Alphabet outperformed expectations. The company earned $27.26 per share on revenue of $61.88 billion. According to Refinitiv, analysts expected earnings per share of $19.34 on revenue of $56.16 billion.
Retail drove a 69 percent increase in total Google advertising revenue over the previous year. YouTube revenue increased by 83 percent year on year to more than $7 billion, approaching Netflix’s quarterly revenue of $7.34 billion.
According to Alphabet CFO Ruth Porat, the third quarter could bring a “more muted tailwind to revenues.” With Covid cases on the rise, Porat believes it is too early to forecast long-term trends as the economy recovers.
Analysts believe that the broader trend of online commerce will continue even if the pandemic continues. That digital shift should benefit Google’s digital advertising.
“We continue to believe there is additional upside because Search and YouTube are well-positioned to support an increasingly digital economy,” said Doug Anmuth of JPMorgan.
Analysts also pointed to growth in Google’s cloud business as evidence of more room for expansion.
“As the company continues to invest in strategic growth initiatives such as AI, machine learning, and cloud infrastructure, we expect revenue momentum to continue into [the third quarter] driven by a combination of improving advertiser demand, a secular shift to streaming, and continued strength from Cloud,” said Michael Morris of Guggenheim.
Alphabet’s stock rose at the start of the trading session on Wednesday. Here’s what analysts had to say about Alphabet’s earnings:
JPMorgan — Upgraded to Overweight, with a price target of $3,250 up from $2638.
“Alphabet remains one of our top picks as key components of the bull thesis, such as ad recovery, margin expansion, Cloud profit growth, and higher capital returns, continued to play out in 2Q. We believe there is still room for growth because Search and YouTube are well-positioned to support an increasingly digital economy. We expect overall [operating income] margins to narrow slightly in 2H21 as GOOGL returns more variable costs, but [management’s] tone here was less cautious than expected, and while the company will invest for future growth, we believe it has likely gained some cost efficiencies as a result of COVID-19.”
Wells Fargo — Overweight, with a $3,100 price target up from $2,850.
“GOOGL appears to be participating rather fully in the 2Q digital ad market recovery, which is outperforming the improving macro backdrop significantly. However, a somewhat muted AH rally (+3 percent) suggests that: 1) investors expected dramatic 2Q outperformance, and 2) investors may question the sustainability of rebounding fundamentals or consider GOOGL to be overpriced. While we still see some challenges ahead (regulatory scrutiny, the rise of super-aggregator apps), we believe GOOGL will emerge from the pandemic largely stronger than it entered, especially given its increased retail profile.”
Citi — Neutral, with a price target of $2,638 up from $2,415 previously.
“Alphabet reported 2Q21 revenue that was 10% higher than the consensus and Citi estimates. Along with the top-line beat, the company reported impressive margins that were well ahead of expectations. While we believe the beat was largely expected, given TWTR and SNAP’s strong results last week, we believe today’s results still exceeded buy side expectations. Given the strong beat, we anticipate a positive reaction in the stock market tomorrow.”
Barclays — Overweight, price target raised from $3,000 to $3,200.
“Digital advertising is proving to be very resilient in this economic cycle, and growth rates across the space, including at Google and YouTube, are staggering due to share shift and easy comps – some of the highest figures we may ever see. Google’s auction-based system is picking up strong categories, while overall activity is high for both consumers and marketers.”
Bank of America — Buy, target price increased to $3,150 from $2,755.
“According to new disclosures, cloud lost $5.5 billion in 2020, which helps explain several years of gross and operating margin pressure. While a change in depreciation [accounting] helped margins, Cloud is now showing significant leverage with 66 percent incremental q/q operating margins (revenues up $580 million, expenses up $200 million). We believe Cloud will break even in the second quarter of next year and generate $3.5 billion in profit by 2023, resulting in a $9 billion three-year increase in operating profit.”
Morgan Stanley — Overweight, with a price target of $3,000 up from $2,575 previously.
“As previously stated, we believe that short form video is the next key online engagement trend that platforms must drive/capitalize on. As the offering scales globally, daily views on YouTube Shorts increased from 3.5 billion in 4Q:20 to 6.5 billion/15 billion in 1Q:21/2Q:21. We see this burgeoning form of unmonetized engagement as a critical incremental driver of long-term revenue growth.”
UBS — Buy, with a price target of $3,190 up from $2,600.
“While GOOG’s digital ad business clearly benefited from a strong ad backdrop, both brand and [direct response], we still see ample room for advertisers to continue to diversify their spend across GOOG properties as digital ad spend continues to play catch-up to the pandemic-driven increase in ecommerce penetration.”
Wedbush — Outperform, with a $3,424 price target up from $2,638.
“Alphabet reported another stellar quarter with strong revenue and margin beats, demonstrating that the ad market is accelerating beyond a rebound, and Cloud is accelerating. Management noted increased consumer activity online as well as broad-based strength in advertiser spend, both of which should continue to be tailwinds for the company. Surprisingly, Google is reinventing itself in online search and is increasingly becoming a critical component of online commerce, challenging the notion that it has ceded ground to Amazon in ecommerce/retail advertising. Meanwhile, it continues to outperform in the Cloud and gain market share.”
BMO Capital Markets — Outperform, price target raised from $2,638 to $3,000
“This year, the outperformance of search/DR revenue is driving a significant increase in Google Services OI margins. We expect them to ease back off in 2022 as normal operating costs fully return; we’ve factored in more investments (particularly at YouTube), but we’re still well above 2019 levels. GOOGL’s own risk disclosures remind investors that margins should decline over time, and we don’t see why that should change; however, a higher perch from which to glide appears to have been set.”
Mizuho — Buy, with a price target of $3,000 up from $2,638.
“Website revenue growth was 20 points higher than expected, at 71 percent year on year, with search accelerating by nearly 40 points and YouTube by 35 points. This outperformance was primarily due to strong demand from Omni-channel, a shift in TV mix, and travel. Cloud grew 54 percent year on year, outperforming expectations by ten points due to increased demand for BigQuery, Cybersecurity, and Network upgrades.”
KeyBanc — Upgraded to Overweight, with a price target of $2,681 up from $2,638.
“The second-quarter results confirmed our thesis about major ad platforms, namely that a global economic recovery would drive robust demand for digital ads. This trend has been especially strong in the Google segment, where reach and ROI have resulted in outsized revenue growth at Search (+68% y/y) and YouTube (+84% y/y). While we expect EPS growth to slow in 2022E due to reinvestment, we are increasingly confident that revenue growth in the mid/high teens is sustainable.”
Credit Suisse — Outperform, price target reduced from $3,350 to $2,638.
“In our opinion, Google’s 2Q21 results provided incremental/stronger signals of what we believe is a critical thematic consequence of the pandemic, which is a greater urgency among retailers/merchants to conduct more of their business online, particularly among SMBs that have lagged in their e-commerce transition. And the higher-than-expected ad revenue result is due not only to Google’s previous efforts to democratize online advertising with simplified AI tools, but also to the onboarding of more merchant supply last year with the release of free listings for Shopping.”
MKM Partners — Buy, price target increased from $2,500 to $3,150.
“Advertising revenue growth has (once again) accelerated, while operating margins have increased” (again). Google Cloud showed improved margins and lower cash burn, which was likely aided by a server life accounting change. Google now intends to repurchase both GOOG (Class A) and GOOGL (Class C) shares in the future. Alphabet is still well-positioned to benefit from macro-reopenings and mass vaccinations in 2021. Google’s ad business should continue to grow as the world’s ‘COVID weak spots’ (travel, offline retail, restaurants, and entertainment) recover.
Jefferies — Buy, with a price target of $3,150 up from $2,950.
“GOOGL delivered its third consecutive [quarter] of big $4B+ [revenue] beat and >30% [operating margin],” the company said (off net [revenue]). Nonetheless, the shift in ad dollars to Google Search and YouTube has “a lot of headroom” left, and we expect more momentum in the second half. “Valuation remains appealing.”
Guggenheim — Buy, with a price target of $3,140 up from $2,850.
“As the company continues to invest in strategic growth initiatives such as AI, machine learning, and cloud infrastructure, we expect revenue momentum to continue into 3Q (+34 percent y/y), driven by a combination of improving advertiser demand, a secular shift to streaming, and continued Cloud strength.”
Piper Sandler — Upgraded to Overweight, with a price target of $3,034 up from $2,635 previously.
“Search revenue of $35.8BN (+68% y/y) outperformed PSC estimates by 11%. Increased online activity, broad-based advertiser strength, and weaker y/y comps all contributed to the outcome. Retail was the most important contributor to growth, followed by travel, finance, and entertainment. CEO Pichai mentioned “search improvements leveraging AI via multi-task unified models, capable of learning and transferring knowledge across 75 languages.”
Stifel — Buy, with a price target of $3,000 up from $2,700.
“Quarterly results benefited from favorable comparisons (which coincided with the low point of pandemic-driven declines) as well as elevated
Jefferies — Buy, with a price target of $3,150 up from $2,950.
“GOOGL delivered its third consecutive [quarter] of big $4B+ [revenue] beat and >30% [operating margin],” the company said (off net [revenue]). Nonetheless, the shift in ad dollars to Google Search and YouTube has “a lot of headroom” left, and we expect more momentum in the second half. “Valuation remains appealing.”
Baird — Outperform, price target raised from $2,700 to $3,100.
“Alphabet remains a top mega-cap pick after reporting strong Q2 results, even better than some of our intra-quarter checks, with positive momentum across multiple verticals of search (e.g., Retail/Travel), positive momentum for YouTube coinciding with a more pronounced shift from linear TV and an inflection point in usage during the pandemic, and accelerating growth for Google Cloud, now benefiting from a more pronounced shift from linear TV and an inflection point in usage during the
Needham — Buy, with a price target of $3,200 up from $2,638.
“We raise our GOOGL estimates and PT based on advertising strength (driven by YouTube), increased profit margins, and continued cyclical improvement offshore post-COVID.” We estimate that if YouTube were traded separately, it would add 45 percent to GOOGL’s share price.”
Bernstein — Outperform, price target of $3,200 raised from $3,000 to $3,200.
“Google remains one of the most crowded names on the Internet, and another A+ print is unlikely to change that. Big number beats everywhere we look, led by YouTube (+84 percent ) and Search (+68 percent ), with the company delivering four consecutive quarters of margin expansion of 1400bps with 31 percent operating margins.”
Truist — Buy, with a price target of $3,100 up from $2,800.
“Strong execution and sustained momentum, particularly in Retail, benefited all ad product lines (Search, YT, Network), whereas changing consumer/business habits benefited Cloud and Other. The margins, which were at a three-year high, were equally impressive. The macro picture remains hazy, and 2H21 growth comps will become more difficult, but we see GOOGL as the best reopening play and one of the best [long-term] growth compounders.”
JMP — Outperform, with a price target of $3,100 up from $2,638.
“The key here, in our opinion, is that the trends driving Google’s 2Q results should continue as consumer behavior is now permanently more digital post pandemic, creating long-term growth opportunities across retail, Omnichannel, video, and virtually every major vertical. In the case of media and video, YouTube provides a 70% increase in reach for TV ad campaigns as more of the $150 billion global TV ad market shifts online.”
Atlantic Equities — Overweight, with a $3,100 price target up from $2,800.
“Q2 revenue and operating profit were well ahead of expectations as advertising continued to grow at a rapid pace, cloud revenue accelerated, and cloud losses narrowed significantly. The competition will get tougher from here, but Alphabet should benefit from the macro strength, the clear accelerated shift of ad dollars online, and the continued migration of enterprise IT spending to the cloud.”
Canaccord Genuity — Buy, with a $3,100 price target up from $2,800.
“Revenue growth will likely slow in the second half of the year as Google begins to face more difficult comps, particularly in the advertising business.” However, ad budgets are continuing to shift from traditional to digital channels at a healthy rate, which, when combined with Google’s multi-year platform investments and ongoing efforts to improve the commerce experience across its ecosystem, should support growth above prior expectations. Given these growth and profitability dynamics, as well as a reasonable valuation, we continue to favor Google as a core large cap holding.”
Susquehanna Financial Group — Upbeat, price target increased to $3,600 from $3,100.
“2Q was another record-breaking quarter across the board, with Search and YouTube putting up massive numbers. Although the competition will be more difficult in the second half, we see no reason why the strong execution should stop. We remain bullish on: 1) the long-term ad growth story driven by mobile search and YouTube, 2) the Cloud ramp, 3) generally better expense management, and 4) a more shareholder-friendly capital allocation strategy.”