Alphabet: All Bets Are On

| About: Alphabet Inc. (GOOG)

Summary

GOOG delivered a strong quarter with strength in mobile, YouTube and Programmatic.

Other Bets continue to see solid top-line growth although much of the growth remains in Nest, Fiber and Verily.

Android ecosystem remains robust and could continue to take share from iOS on the back of rising handset sales.

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) managed to deliver another strong quarter and as expected mobile, YouTube and programmatic drove much of the beat similar to that of the previous quarter. Notably, US and FX adjusted revenue reached the highest level in the past five years and mobile usage continues to see meaningful improvement in monetization. Although Other Bet sdid not show meaningful financial improvements, the outlook remains quite positive as I believe GOOG Fiber has tremendous potential in taking shares from the incumbent telecom and cable providers such as Verizon (NYSE:VZ) and AT&T (NYSE:T) in broadband. (See - Alphabet: Google Fiber Will Eat AT&T And Verizon's Lunch) More important, the core business remains resilient and the free cash generated from this segment should continue to support GOOG to attract talent and make longer bets projects that will likely be an important part of our daily lives decades out. I remain bullish on this story and continue to favor GOOG over Baidu (NASDAQ:BIDU) which is facing a maturing Chinese search market and lack of promising alternatives besides search (see - Baidu: Time To Punch Out).

GOOG revenue of $21.3b was a +21% y/y increase which includes an FX impact. Revenue ex-TAC of $17.5b easily beat consensus $16.9b driven by +19% growth in ad revenue. Cost-per-click was down -7% (vs. consensus -6%) but the overall paid clicks grew +29% compared with consensus +27% growth. Site revenue continues to see solid growth, +24% y/y to $15.4b which is reflective of the substantial strength in Mobile Search from the improvement in ad format and delivery that GOOG launched in 3Q15.

As expected, YouTube growth remains strong driven primarily by video advertising across TrueView and increasingly Google Preferred, with a growing contribution from buying on DoubleClick Bid Manager. Video remains a critical component GOOG's overall ecosystem and there are more than 1k creators across 1k subs each day, indicating strong engagement and monetization potential. Similar to FB, GOOG is keen on live streaming (see - Facebook: No Stopping This Juggernaut) and is expanding beyond 360-degree video. Going forward, mobile live streaming will be a growth area and this is where GOOG can leverage its Android ecosystem, in my view.

Other revenue of $2.2b represented 33% y/y growth. Although this is still a small portion of GOOG's overall revenue profile, it is not insignificant as it is a leading indicator of GOOG's ecosystem health. Note that (NASDAQ:AAPL) AAPL's software revenue is stagnating on the back of declining device sales (see - Apple: Sell On Strength) and I believe that GOOG has a better software/app outlook than AAPL due to its broader footprint. Assets such as Chrome, Android and VR will continue to drive cross-selling of Android services to over 1b MAUs within Android's ecosystem. The new Android version Nougat will be especially important in driving GOOG's own Android initiative on smartphones and I believe that commoditizing the Android experience will be an important step for GOOG to strengthen its ecosystem.

Finally, Other Bets revenue of $185m more than doubled from the prior year. Although most of the projects are pre-revenue and that this segment continues to rely on Nest, Fiber and Verily, driverless cars, drones, robotics and AI all have attractive potential that could be an integrated part of our lives similar to Gmail or search.

Remain bullish on GOOG outlook. As long as the core business remains FCF positive (5% FCF yield on 2017E consensus), then I believe GOOG will have sufficient resources to make big bets on its moonshot projects.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.