Can Alphabet (GOOGL) replicate the success of Search in non-core areas?

Underlining the relevance of its distinctive offerings, Alphabet Inc. (NASDAQ: GOOG/GOOGL) continues to navigate the coronavirus crisis effectively, partly benefiting from the new opportunities unfolding in the digital space. Currently, the company that owns search service giant Google is on a mission to expand the non-core areas of its business, especially Google Cloud and the YouTube streaming service.

Experts are unanimous in recommending the stock that looks unstoppable even at the peak, with a target price that represents a 16% growth in the next twelve months. While GOOGL remains everyone’s favorite, not all investors would find it affordable. When most of its tech peers slipped into the negative territory as the busy earnings week came to an end, Alphabet remained an exception.

Diversification

In the third quarter, revenues returned to growth from last quarter’s contraction, underscoring the sustainability of the Silicon Valley tech firm that has diversified far beyond internet search over the years. The highlight of the third quarter was the impressive performance of YouTube and the cloud business that topped expectations.

Going forward, cloud revenue will be reported separately to ensure transparency and track the progress of the segment, which has been considered a laggard in the industry currently dominated by Amazon (AMZN) Web Services and Microsoft’s (MSFT) Azure.

Also read: Alphabet Q3 2020 earnings transcript

Elsewhere, the growing adoption of services like Google Workspace — thanks to the remote work shift — is expected to continue in the foreseeable future. However, like any other business, the management is concerned about the ongoing uncertainty.

“While we’re pleased with our performance in the third quarter, there is obviously uncertainty in the external environment. In terms of Google Cloud, we’re pleased with the consistent strong revenue growth that you saw again this quarter, reflecting the extraordinary secular trend underway,” said chief financial officer Ruth Porat.

Blockbuster Q3

Total revenues jumped 14% from last year to $46.17 billion, supported by a 10% growth in advertising revenue. The ad momentum, spread across the key operating segments of Search and YouTube, has helped in allaying fears of the pandemic affecting ad spending. Consequently, earnings surged to $16.4 per share from $10.12 per share in the third quarter of 2019. Interestingly, both revenues and bottom-line exceeded experts’ predictions.

Investments

The management’s aggressive cloud push demands substantial investment and that could put pressure on the bottom-line going forward. As far as capital expenditure is concerned, the other focus areas are Search, YouTube, Maps, and shopping. Meanwhile, the looming anti-trust lawsuit would continue to be a distraction for the management until it comes clean on the charges.

We know our success in Search is not guaranteed. We remain committed to investing to build the most helpful, most trusted search experience, just we have for the last 22 years. On that note, regarding the DOJ’s lawsuit, we believe that our products are creating significant consumer benefits and we’ll confidently make our case. Our Company’s focus remains on continuing our work to build a search product that people love and value.

Sundar Pichai, chief executive officer of Alphabet

Read management/analysts’ comments on quarterly reports

After a brief pullback, Alphabet’s stock is once again hovering near the recent peak, thanks to the rally that followed the third-quarter earnings report. Beating the COVID-linked volatility, the shares have gained 16% since the beginning of the year.