Alphabet GOOGL reported a top- and bottom-line beat with its third-quarter results this afternoon. The company reported revenues of $27.8 billion (up 24% from last year's second quarter), exceeding expectations of $27.2 billion. EPS came in at $9.57 for the quarter, beating expectations of $8.33. In addition to the strong revenue growth, contributing to the better-than-expected earnings was a year-over-year increase to the company's operating margins, which came in at 28% (up from 26% in last year's third quarter) despite rising traffic acquisition costs (more on this later).
Digging deeper into the report, Google properties' (formerly labeled "websites"; in other words, the core business) revenues grew 22.5% year over year to $19.723 billion, beating consensus estimates of $19.296 billion and accelerating year-over-year growth compared to the prior quarter. Google advertising revenue rose 21% year over year to $24.065 billion.
Google Other revenue, which includes Pixel sales, cloud services, and Google Play, grew 40% year over year to $3.405 billion, which edged the consensus of $3.389 billion. Google Home's integrations with Walmart (WMT) , Target (TGT) and other large retailers have created strong interest for the product, and on the earnings call CEO Sundar Pichai said he believes the company is just getting started on improving the buying experience for users. With the rise in popularity in e-commerce, creating a personal shipping product that seamlessly integrates multiple retailers in one has the potential to be a very dynamic product in the future, and management's commitment to creating a better experience for the at-home shopper will promote brand loyalty to adopt GOOGL's family of products.
Lastly, the Other Bets reporting segment, which covers businesses such as Waymo, Google Fiber, Nest and Verily, reported an operating loss of $812 million (up from a loss of $861 million a year ago) on revenue of $302 million, representing a 53% year-over-year increase in sales. Sequentially, the segment's revenue increased from $248 million last quarter, but the operating losses were greater than the second quarter's $722 million loss. This segment contains many of Alphabet's "moonshot" projects that require heavy capital investment, which leads to the operating losses.
While the bears may point to Alphabet's continued willingness to invest in these projects without the support of earnings as a point of pain, we would say the disruption potential in projects like Waymo could help share the future. Just last week, the company announced it is heavily investing in ride-sharing company Lyft. We told members in an Alert here how this deal could further improve and develop Waymo's autonomous driving technology. Waymo has put self-driven cars in more than 20 cities over the last eight years, and the company said today it will begin testing this winter in Michigan to improve driving challenges in difficult climates.
On some of the core operating metrics, aggregate paid clicks grew 47% year over year and 6% sequentially. Paid clicks on Google websites grew 55% year over year and 7% sequentially.
Importantly, total traffic acquisition costs (TAC) increased 31.5% year over year to $5.502 billion, and TAC as a percentage of Google's advertising revenues increased from 21% in last year's third quarter to 23% this quarter. The 23% figure is a tick higher from the second-quarter results of 22%. One of the main drivers for the increase in TAC and TAC as a percentage of advertising revenues has been the increased presence of mobile search, which naturally carries a higher cost compared to other areas. Despite the pressures, management has been very upfront that they expected this trend to continue, signaling strength in GOOGL's mobile businesses.
While this was a cause of concern for investors last quarter, the rising revenue and earnings figures likely dulled investor concerns that rising TAC would be an issue to the company's bottom line. Management has said they welcome the shift to higher cost platforms like mobile and YouTube due to the higher-volume growth and industry trends, and they are willing to trade off the compressing margins for greater profits, which we would agree with.
Overall, we believe this was an excellent quarter for the company and illustrates our confidence to point out buying opportunities whenever the stock dipped to the lower $900s. The company has slowly increased in diversification away from relying on search, as shown with the higher revenues in its other segments. Although the platform remains a dominant force for the company, we believe the progress being made in Other revenue and "Other bets" will help Alphabet increase in valuation. Not only will advances in artificial intelligence and machine-learning technologies improve advertiser relationships through smarter and more targeted advertisements, but developments in its capabilities will improve the Alphabet ecosystem of products and Waymo segment.
We continue to view GOOGL as an excellent core holding in our portfolio, and the company's strong quarter reinforces our outlook for the stock.
Join Jim Cramer, CNBC's Jon Najarian and Other Experts Saturday in New York
Jim Cramer will host CNBC's Jon Najarian, TD Ameritrade's JJ Kinahan, famed analytics expert Marc Chaikin and other market mavens on Oct. 28 in New York City to share successful strategies for active investors.
You can join them as they discuss how smart investors can make the most of options trading, futures contracts, fundamental and quantitative analysis and great ETFs to buy right now. Participants will also get a chance to meet Jim and other panelists and take photos.
When: Saturday, 8 a.m.-3 p.m. ET
Where: The Harvard Club of New York, 35 W. 44th St., New York, N.Y.
Cost: $250 per person.
Click here for the full conference agenda or to reserve your seat now.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long GOOGL.