The Far-Reaching Implications of Alphabet (GOOG: GOOGL)’s Great Earnings

I wrote on Thursday that stock in the big tech companies that had come under pressure because of the announced Justice Department investigation should be evaluated not on the politics, but the profits. That was in the morning, then, after the market closed, Alphabet (GOOG: GOOGL), the parent company of Google, proved my point when they reported second-quarter earnings. There are a number of ways that one could describe those earnings. “Spectacular,” “fantastic,” and “wow!” come to mind, for example, but their potential impact goes beyond just the short-term benefits of great sales and profits.

The headline number was earnings per share (EPS) of $14.21 versus consensus expectations for around $11.30, per Refinitiv’s analyst survey. A beat like that is an excellent result for any company, but for one as widely covered and heavily analyzed as Alphabet, it is also extremely rare. As if the EPS number wasn’t good enough by itself though, everywhere you look in this report there was good news, and most of it came in areas that the bears have been highlighting as problematical in the last few months.

Unlike some big tech companies, Google’s growth is not about adding users. Quite a while ago now, they passed the point where that was relevant or even possible. Despite the best efforts of Microsoft (MSFT)’s Bing and others, there is really only one search engine. We don’t “Bing” anything, we Google it, and that is true around most of the world. So, Google’s success is measured in a more conventional way—by how much money they can make.

They make their money from advertising, but not in a traditional sense. They give companies the chance to promote their services at the top of your search results, then charge them a fee for each click on the ad. That “Cost per Click (CPC)” varies enormously, from fractions of a penny to well over $50 per click for things with recurring revenue streams, like say insurance. CPC is the metric that has been falling in recent Google results, and that has led to the stock falling as far as it has.

CPC remained under pressure last quarter, down 11% from the same quarter a year ago. Given that, the beat must have come from an increased number of clicks, and boy did it! Clicks were up an astounding 28% from last year, which is good news on two fronts.

First, it will help to at least halt the slide in CPC. If ads are getting results, they are obviously worth more to the advertisers. Second, and probably more important right now, it shows that, despite the campaign from the political right here in the U.S. alleging bias in search results and the ongoing complaints from the left about Google’s sheer size and level of success, we, the internet-using public, still love them.

From a business perspective, popularity doesn’t matter unless you can monetize it, but in politics, it is everything. It pains me to say it in some ways but, as I suggested yesterday, the decisions of the Justice Department are far more about politics than the law, so Google’s enduring popularity may give pause to those attacking the company. Those attackers are vocal and loud in traditional and social media, but these numbers reinforce that they are, in fact, a tiny minority. Upsetting most of the country to appease them doesn’t make sense politically.

Alphabet’s Q2 results were a blowout on both the top and bottom lines, but the real significance came in how the company achieved those results. The massive increase and beat of expectations in terms of the number of clicks suggest that even though people are more aware of the potential privacy issues with the company and other perceived downsides to their dominance of search, they continue to use Google in massive numbers. That bodes well for the future of the stock, no matter what happens in the political arena.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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