ii view: Alphabet invests in the Cloud and machine learning

Google-owner Alphabet is investing in its many businesses, but should investors buy the shares?

Third-quarter results to 30 September 2019

• Revenue up 20% to $40.5 billion
• Net income down 23% to $7.02 billion
• Earnings per share down 22.5% to $10.12

Chief executive Sundar Pichai said:

"I am extremely pleased with the progress we made across the board in the third quarter, from our recent advancements in search and quantum computing to our strong revenue growth driven by mobile search, YouTube and Cloud. We're focused on providing the most helpful services to our users and partners, and we see many opportunities ahead."

ii round-up:

Internet search engine giant Alphabet (NASDAQ:GOOGL) reported third-quarter earnings which missed analysts' forecasts as it focused on investments in Cloud data centres and machine learning. 

Earnings per share of $10.12 proved way short of estimates nearer $12.50, although group revenue and other metrics beat or matched forecasts. Capital expenditure rose by 27% to $6.73 billion. 

The share price declined by around 3% in after-hours US stock market trading. 

Staff numbers jumped by 21% to 114,096 as the company invested in new talent to bolster its Cloud data operations in a race to catch larger rivals Amazon.com Inc (NASDAQ:AMZN) and Microsoft Corp (NASDAQ:MSFT). 

Still accounting for the bulk of group sales, advertising revenue increased by 17% to $33.9 billion, while other revenues which includes sales of its Pixel phones enjoyed a 38% hike to $6.4 billion. Sales for its Other Bets division, including its self-driving car company Waymo, improved 6% to $155 million. 

Management refused to comment on speculation regarding reports that it had bid for fitness-tracking device company Fitbit (NYSE:FIT), although it did reference its quantum computing development. In September, it claimed to have built a quantum computer that is able to perform a calculation in three minutes and 20 seconds compared with the 10,000 years it would take today's most advance computer. 

ii view:

If Apple (NASDAQ:AAPL) is smartphones and Microsoft operating and business software, Alphabet Google is synonymous with the internet and the ability to search its now endless data. 

Its ability to advertise and display their services using its technology has underwritten phenomenal growth. However, Alphabet is far more than advertising. It is investing in Cloud centres to host ever increasing amounts of data, its Google Nest devices compete with Amazon's Alexa, while developments in quantum computing appear to be the stuff of science fiction.

For investors, double-digit revenue growth displays ongoing growth, despite its earnings miss this quarter due to heavy investment. A forward price/earnings (PE) ratio below the three- and 10-year averages offers encouragement. 

Positives

• Holds a dominant position in online advertising
• Management believes Artificial Intelligence offers enormous opportunities ahead
• Waymo could one day compete with Ford (NYSE:F) and Tesla (NASDAQ:TSLA)

Negatives

• Earnings missed estimates
• Technology giants suffering increased global government scrutiny
• No current dividend payment

The average rating of stock market analysts:

Strong buy