Key Takeaways

  • EPS was $16.40 vs. the $11.21 analysts expected.
  • Revenue exceeded analyst expectations.
  • Cloud revenue was higher than the level analysts estimated.
  • Strong growth was led by increased demand for advertising.

What Happened

Google parent Alphabet posted Q3 2020 EPS that beat analysts' estimates by a wide margin. Both total revenue and cloud revenue also surpassed expectations. Net income, revenue, and cloud revenue all rose compared to the year-ago quarter driven by increased advertising spend.

"Total revenues of $46.2 billion in the third quarter reflect broad based growth led by an increase in advertiser spend in Search and YouTube as well as continued strength in Google Cloud and Play," said CFO Ruth Porat.

(Below is Investopedia's original earnings preview, published October 22, 2020.)

What to Look For

Alphabet Inc. (GOOGL) subsidiary Google is being sued by the U.S. Department of Justice over alleged anticompetitive practices, adding to the tech giant's recent struggles. The landmark case against Google, which controls about 90% of the online search market, comes after a dismal second quarter performance in which its advertising revenue fell for the first time in its 22-year history. 

Investors will be looking for signs of whether Alphabet can reverse its recent decline when it reports earnings on October 29, 2020 for Q3 FY 2020. Analysts expect earnings per share (EPS) and revenue to rise year over year (YOY), rebounding from the declines posted in Q2 2020.

While Alphabet overall has been hurt by the COVID-19 pandemic, its cloud business remains strong due to the acceleration of the work-from-home economy. Analysts expect Google's cloud revenue, an increasingly important key metric for Alphabet, to post healthy gains, though at a slower pace than previous quarters.

Despite Alphabet's challenges, its stock has outpaced the broader market over the past year. Alphabet's stock has provided a total return of 27.5% over the past 12 months, nearly twice as much as the S&P 500's total return of 14.3%, as of October 21, 2020.

One Year Total Return for S&P 500 and Alphabet
Source: TradingView.

Alphabet's shares slumped following its Q2 FY 2020 earnings report, despite beating analysts' estimates. EPS plunged 29.5%, marking its biggest YOY decline since Q1 FY 2019. Revenue fell 1.9%, the first decline in at least 16 quarters as advertisers reduced ad spending with the economic slowdown. Alphabet gets the vast majority of its revenue from advertising. 

The first quarter of the year was only slightly better. EPS in Q1 FY 2020 rose 4.0% compared to the year-ago quarter. Revenue rose 12.8%. But due to plunging advertising in March, that increase was significantly below the average quarterly revenue growth of nearly 19% in 2019. 

Analysts are forecasting Q3 FY 2020 EPS and revenue to rebound from Q2. EPS is expected to rise 10.7% while revenue grows just 5.7% compared to the same three-month period a year ago. For full-year 2020, analysts expect EPS to fall by 9.2%, the worst yearly performance since 2017. Revenue is expected to grow just 6.7% in 2020, well below the 18-23% range recorded over the past four years.

Google (Alphabet) Key Metrics
  Estimate for Q3 2020 Q3 2019 Q3 2018
Earnings Per Share ($) 11.21 10.12 13.06
Revenue ($B) 42.8 40.5 33.7
Google Cloud Revenue ($B) 3.3 2.4 1.5

Source: Visible Alpha

Investors will focus on Google cloud revenue, which includes revenue from Alphabet's various cloud offerings: Google Cloud Platform, including infrastructure, data and analytics, and other services; G Suite productivity tools; and other enterprise cloud services. Alphabet is devoting significant resources to develop its cloud offerings as the cloud computing market grows and other sources of revenue begin to slow.

While demand for cloud-based computing has increased as more people work from home, Alphabet faces stiff competition from Amazon.com Inc.'s (AMZN) Amazon Web Services (AWS), Microsoft Corp.'s (MSFT) Azure, and others. Growth in the company's cloud revenue reached a recent peak of 60.3% in Q3 FY 2019. YOY growth has decelerated in every quarter since, slowing to 52.2% in Q1 FY 2020 and then to 43.2% in Q2 FY 2020. Analysts expect a further deceleration in Q3 FY 2020, estimating a 38.3% increase YOY.