Shares of Alphabet (GOOG) dropped nearly 10% recently after the internet media and services giant turned in Q3 results that included disappointing Cloud revenue. But we continue to think GOOG is a terrific company trading at a reasonable valuation, writes John Buckingham, editor of The Prudent Speculator.

Alphabet earned $1.55 per share (vs. $1.45 est.) and had revenue excluding TAC (traffic acquisition cost) of $64.1 billion, a figure $1.0 billion better than analysts were expecting. Google advertising revenue was $59.7 billion (vs. $58.9 billion est.) and YouTube advertising was $150 million better than projected.

The problem for traders was that Google Cloud revenue was $8.4 billion, a figure which trailed the $8.6 billion consensus estimate and has been considered one of Google’s best segments for growth. CFO Ruth Porat offered the outlook:

“With respect to Google Services, first within advertising. After a period of historic volatility, we were pleased with the year-on-year revenue growth of Search and YouTube advertising in the third quarter. Second, within Other revenues, in our YouTube subscription products, the substantial growth in revenues primarily reflects subscriber growth. Looking ahead, a full quarter of NFL Sunday Ticket revenues as well as associated content acquisition costs, will be reflected in Q4 results, compared to only a few weeks in the third quarter.”

Alphabet (GOOG)

Ms. Porat continued: “We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024. In closing, we remain very excited about the opportunities ahead and committed to deliver sustainable financial value.”

Alphabet shares retreated following the Q3 results but were still recently up 39% this year. While the quarter was a bit of a setback for Cloud growth hopes, we think the Advertising and Search businesses have not run out of demand and can continue to offer sizable growth opportunities, even if analysts and investors are looking to the Cloud for the next phase of Alphabet’s corporate life.

Of course, the prospects for generative AI continue to fuel excitement among Tech investors, even if there isn’t the hoopla that propelled stocks earlier this year, and we like that Alphabet’s management team has been thoughtful about its implementation. Marketing dollars continue to be spent in large quantities.

We also like the EPS growth prospects, which analysts project to be in the 14% to 25% range annually through 2026. Alphabet sits on a mountain of cash ($120 billion of cash versus $13 billion of long-term debt) and the company has been retiring shares. Not seeing much wrong with the quarter or outlook, our Target Price for GOOG is now $169.

Recommended Action: Buy GOOG

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