Alphabet (GOOG) (GOOGL) third-quarter results beat the FactSet consensus estimates on the top and bottom line, benefiting from strong advertising demand in various verticals, less impact of Apple’s changes to its iOS, and continuing strong growth in cloud. With further YouTube and other Google apps monetization opportunities and the firm’s increasing traction in the cloud market, we have slightly increased our projections, resulting in a 6% increase in our Alphabet fair value estimate to $3,400. Wide-moat Alphabet continues to trade at a discount to our fair value estimate.
Total revenue increased 41% year over year to $65.1 billion, driven by higher ad spending and further strength in cloud. Growth in search (44%) and YouTube (43%) drove advertising revenue up 43% from last year to $53.1 billion. Advertising revenue was also 57% above pre-pandemic levels during the same quarter in 2019. Google continued to benefit from higher ad spending from firms in the retail and travel sectors, along with media, entertainment, and finance.
As expected, YouTube benefited from more brand advertising spending, which coincidentally also slightly shielded the platform from impact of Apple’s data privacy changes. We still believe that with a large user base, YouTube will attract more direct response ad purchases, increasing the platform’s user monetization, but at a slower rate due to Apple. We also expect the increase in new business formations, the firm’s efforts in further monetizing Google Maps, along with more viewers that YouTube Shorts may attract, to drive continuing growth in Google advertising revenue.
On the subscription front, YouTube Premium (including YouTube Music) now has 50 million subscribers, up 67% from the end of 2020. While the subscription-based music and video streaming markets remain very competitive, we think growth on that front for Google will provide support for its network effect moat source.
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