Alphabet: Core Ad Revenue Growth Back to Normal in Q3

Company Update (GOOG US) (Buy)

Highlights

• Ad revenues grew 9.5% in Q3, including 12.5% in YouTube

• Ad revenues had a 2019-23 CAGR of ~15% in each of Q1-3

• Google Cloud revenue growth slowed, but was still 22%

• EPS is up 18.8% YTD; P/E is 24.7x relative to LTM EPS

• We believe shares can return 83% (20.7% p.a.) by 2026. Buy

Introduction

Alphabet released Q3 2023 results after market close yesterday (October 24); shares are down ~7% pre-market.

Alphabet shares had been strong prior to Q3 results, with the price of Class C shares rising 56% year-to-date:

Alphabet Share Price (Last 1 Year Before Q3 Results)

Source: Google Finance (24-Oct-23).

Even after the decline in pre-market trading, Class C shares were still up 37% in less than 3 years after we first published our Buy rating in January 2021.

We believe Alphabet shares remain cheap and the post-results decline was an over-reaction, neglecting the strong growth in the core advertising business but instead focusing on a small deceleration in Google Cloud.

Google Advertising has return…