Strong YouTube ad growth powers Alphabet to better-than-expected Q3

Today after the bell, Alphabet announced its Q3 performance. The Google parent company generated revenues of $46.2 billion and per-share profit of $16.40 off the back of net income of $11.2 billion.

Analysts had expected Alphabet to earn $11.21 per share, from revenues of $42.88 billion according to Yahoo Finance; other estimates were larger, targeting $11.37 in per-share income off revenue of $42.84 billion.

The company’s shares instantly rose around 8.5% after its earnings beat.

Of all the major tech companies to report today — Twitter, Facebook, Apple, Amazon, and Alphabet — this is the most positive market reaction that we’ve seen. How did it come together? Let’s take a look.

Sum of the parts

Digging into the company’s numbers, YouTube revenue rose to $5.0 billion, from $3.8 billion in Q3 2019. Analysts had expected YouTube to generate $4.52 billion in total revenue during the most recent quarter.

Google Cloud managed to generate $3.44 billion from $2.4 billion in Q3 2019. The Google Cloud collection of cloud computing, productivity software and other enterprise services generated $3.0 billion in the second quarter of this year. Analysts had expected Google Cloud to generate $3.31 billion in total revenue during the most recent quarter.

And Alphabet’s skunkworks division, Other Bets managed to generate $178 million in revenue, another quarter in which the set of companies was an excellent source of negative operating income. The collection of efforts lost $1.1 billion in the quarter.

That loss was higher than the year-ago operating deficit of $941 million for Other Bets, implying that its financial issues remain. Of course, Alphabet doesn’t intend for Other Bets to generate positive net income. But to see it torch north of $1 billion in operating profit is still somewhat surprising. Google revenues made up 99.66% of the company’s total revenues for the period, for reference.

Finally, Alphabet continues to be an amazing business. The company generate net cash from operations of $17.0 billion in the quarter, leading to free cash flow of $11.6 billion. Damn.