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Alphabet reports a strong third quarter despite free-falling advertising values

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Image Credits: Jeff Chiu / AP

Alphabet’s strategy of trying to stuff the difference between declining mobile advertising value with additional clicks appears to still be paying off as the company once again showed Wall Street that it can make a ton of money and continue to grow.

Alphabet (we’re just gonna call it what it is because we’re talking about the core business: Google) reported earnings of $9.06 per share on revenue of $22.4 billion. That’s another 20 percent gain compared to the same quarter a year ago. Wall Street was looking for earnings of $8.64 per share on revenue of $22.05 billion.

Google’s business was for some time called into question because the value of advertisements on mobile was not as high as on desktop — specifically desktop search — which was Google’s sweet spot. Indeed, Google’s cost-per-click, a key metric determining the value of an ad, fell another 11 percent year-over-year this quarter. But aggregate paid clicks increased 33 percent in the third quarter year-over-year, showing it’s still able to compensate for that decrease. In the last quarter, Google’s cost-per-click fell 7 percent compared to the second quarter in 2015, and cost-per-click was down 5 percent quarter-over-quarter.

Still, it’s going to remain a question mark for some time as its cost-per-click continues at a double-digit decline. Google has to get its ads on as many devices and in as many mediums as it possibly can — whether that’s through a voice-driven speaker, its own phone where it can control the experience or pushing its services across as many devices as it possibly can. Wall Street may tolerate that decline for the time being, but it’s going to have to taper off at some point if Google is going to show it’s going to be a strong core business.

For now, because the company’s strategy is working, and that last quarter the company showed it could continue to work, it looks like Wall Street is happy. The stock isn’t going ballistic — it’s up about 2 percent — but it’s not on a wild swing down right now, either. In addition, Google is also authorizing a roughly $7 billion share repurchase program, in another move that is going to return additional value to its overlords on Wall Street.

As the years have passed, Google has gone from one of the only online advertising juggernauts to going head-to-head with Facebook, whose advertising business is rapidly expanding and offering a good alternative to Google. Both perform really well at different parts of the marketing funnel — Facebook is great for brand awareness while Google is good for capturing purchase intent with search — but they’re increasingly competing with each other for advertising dollars.

And that’s also not to mention emerging platforms like Snapchat which, while it isn’t necessarily a threat to Google yet, represents a potential additional advertising platform that could suck away the dollars Google is hoping to acquire as it tries to further expand its advertising business. Snapchat’s valuation may reach as high as $35 billion in an upcoming IPO, and it previously projected it would hit $1 billion in revenue in 2017.

So while Alphabet has been trying to rapidly roll out new devices and markets, like Google Home and the Pixel, all eyes are still going to be on its advertising business for now — which is staggering. In fact, questions about the company’s advertising growth were at the time largely stamped out when it delivered a tremendous second quarter that showed that it could continue to grow that business.

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Okay! Back to Alphabet.

Earlier this month, Alphabet held an event where it unveiled its first phone, the Pixel, and an Amazon Echo-like device in Google Home. It’s also pushing its voice assistant, Google Assistant, hard across all its devices as it looks to get people closer and closer to using Google for mundane tasks. While not necessarily monetized, there’s plenty of opportunity to do so, and keeping users glued to their devices gives them more eyeballs that they could potentially monetize with ads.

But not everything is well within the Alphabet empire. The company’s “other bets” revenue increased only marginally from $141 million to $197 million while still losing nearly $1 billion. The loss declined year-over-year — from $980 million in the third quarter last year to $865 in the third quarter this year — but Alphabet, and in particular CFO Ruth Porat, have indicated that the company is going to be more judicious about its spending going forward.

In the past year, Alphabet shares have gone up by around 11 percent. That’s not quite the crazy performance of Facebook — which is seen to be a huge growth opportunity — which has grown around 24 percent. But Google is also worth around $550 billion, and even small-point swings represent an enormous shift in value for the company. At one point, even, Google surpassed Apple as the most valuable company in the world.

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