Did Google really have a seriously bad Q3?

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Alphabet Inc (NASDAQ: GOOGL) is trading down in extended trading after the tech behemoth reported disappointing results for its fiscal third quarter.

Gene Munster reacts to Google’s results

As expected, much of the weakness was related to advertising. Ad sales brought in $54.5 billion this quarter, missing consensus by more than $2.0 billion. Still, Loup Ventures’ Gene Munster said on CNBC’s “Fast Money”:

There’s nothing in this that makes me think the business won’t rebound. Google is impacted by macro. But we can’t separate our lives from their products and advertisers understand that. Ultimately, investors will recognise that and shares will respond appropriately.

For now, though, YouTube ad sales were down 2.0% versus last year (weaker-than-expected). Resulted were affected by the currency headwinds in Q3 as well.

Search grew only 4.0% this quarter but topped estimates, nonetheless.

Alphabet Inc to slowdown hiring

Alphabet Inc ended the quarter with 187,000 employees – about 25% more than a year ago, as per the earnings press release. That may not sit well with investors considering the multinational took a 7.0% hit to operating margin in Q3. But Munster noted:

September typically is a strong quarter for headcount but broader trajectory around it is flattening. They’ve talked about getting 20% more productivity out of people. Investors will like that long term too because that should have a positive impact on margin.

Management has also signalled the pace of hiring in the current quarter will be significantly slower than the Q3. A year from now, Munster expects Google to return to a 20% growth that investors are more used to.

Google Cloud was the brightest spot in Q3

A particularly bright spot in Alphabet’s earnings report was “Cloud”. Revenue from this segment went up 38% on a year-over-year basis to $6.9 billion, handily beating the Street at $6.69 billion. In a separate CNBC interview, Larry Cordisco of Osterweis Capital Management said:

In my mind, there’s a lot more emphasis on Google Cloud and the need for it to accelerate to profitability over the next couple of years. Because there’s a dollar of earnings power there. It’ll be a big deal to unlocking value in this stock.

Wall Street also recommends buying Google stock and sees upside in it to $139 on average – up about 40% from here.

Other notable figures in the earnings report

Net income was $13.9 billion versus the year-ago $18.9 billion
Per-share earnings fell significantly from $1.40 to $1.06
Revenue (ex-TAC) went up 7.0% year-on-year to $57.3 billion
Consensus was $1.26 a share on $58.2 billion in ex-TAC revenue

For the year, Google stock is now down nearly 35%.

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