What Happened?

Shares of online advertising giant Alphabet (NASDAQ:GOOGL) jumped 7% in the morning session after the company reported third-quarter earnings that exceeded analysts' revenue, operating income, and EPS expectations. The segments themselves were also all solid, with Search, YouTube, and Cloud all exceeding revenue estimates. Leading the pack was the cloud segment, which grew 35% year on year. Up next was YouTube, with combined ad and subscription revenue over the past four quarters surpassing $50 billion. 

To top it off, the company continued to demonstrate new ways to innovate in the Search business, its primary cash cow. First, AI Overviews (like generative AI for Google Search) are being rolled out in 100 countries, reaching more than 1 billion users monthly. Second, Circle to Search, which makes it as easy as pinching your screen to search for an image or video, is also available on over 150 million Android devices. 

Lastly, the company continued to make significant progress in other bets that can expand its addressable market and create new monetizable opportunities. Weekly, Waymo reached 1 million fully autonomous miles and serves over 150,000 paid rides, the first among autonomous vehicle companies. These updates are closely watched and anticipated by analysts, as they often earmark significant progress toward the mass adoption and monetization of autonomous vehicles. 

Moving to the bottom line, operating profit at the segments also beat. Interestingly, GOOGL noted that 25% of new code generated at the company is powered by AI, indicating the potential efficiency that can be delivered internally and to customers. Zooming out, we think this was an impressive quarter. After the initial pop the shares cooled down to $176.87, up 4.2% from previous close.

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What The Market Is Telling Us

Alphabet’s shares are quite volatile and have had 17 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 21 days ago when the stock dropped 2.5% on the news that the Department of Justice is reportedly exploring a breakup of the Google division along with other options. According to a government court filing, "That would prevent Google from using products such as Chrome, Play, and Android to advantage Google search and Google search-related products and features — including emerging search access points and features, such as artificial intelligence — over rivals or new entrants." 

This follows a federal judge ruling in August 2024 that Google violated U.S. antitrust laws. Google responded in a blog post, "We believe that today's blueprint goes well beyond the legal scope of the Court's decision about Search distribution contracts. Government overreach in a fast-moving industry may have negative unintended consequences for American innovation and America's consumers. We look forward to making our arguments in court."

Alphabet is up 28% since the beginning of the year, and at $176.87 per share, it is trading close to its 52-week high of $191.18 from July 2024. Investors who bought $1,000 worth of Alphabet’s shares 5 years ago would now be looking at an investment worth $2,806.

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