The Ratings Game: Promise of transparency on Google Cloud results cheers Wall Street, Alphabet stock climbs

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Google parent Alphabet Inc. shares were on track for their best day in more than six months after the tech giant blew past Wall Street estimates with a return to revenue growth and a promise to be more transparent about cloud profitability.

Alphabet GOOG, +4.15% GOOGL, +4.58% shares rallied nearly 8% Friday after the tech giant handily beat Wall Street estimates on earnings and returned to revenue growth in its ad business, though gains calmed down to less than 5% later in the session. That’s still on track for the best one-day gain for the stock since April 29, when shares rose 8.7% following first-quarter results.

At least two dozen analysts increased their price targets on Alphabet stock Friday morning. J.P. Morgan analyst Doug Anmuth, who raised his price target to $1,870 from $1,770 and has an overweight rating, applauded one of the highlights of the report — Alphabet’s decision to start disclosing the profitability of its Google Cloud Platform business in the fourth quarter.

The company started breaking out YouTube and Google Cloud revenues earlier this year, after fighting the Securities and Exchange Commission for years to avoid reporting financial information on some of its individual businesses. In the third quarter, Alphabet reported YouTube ad revenue rose 33% to $5.04 billion from a year ago, and GCP sales rose 45% to $3.44 billion.

On Thursday’s call, Alphabet Chief Executive Sundar Pichai said the company will start breaking out more detail on its Google Cloud Platform, or GCP, as a “separate reporting segment” beginning in the fourth quarter. Alphabet plans to offer the information dating back to 2018.

“With this segmentation, you will additionally see information about the scale of our investments, which should help you gauge the progress we’re making on the multiyear path ahead to create sustainable value,” Pichai said.

The move differentiates Alphabet from one of it main cloud competitors, Microsoft Corp. MSFT, -1.62% While Inc. AMZN, -5.19% offers quarterly revenue and operating profit information on its leading cloud-computing offering, Amazon Web Services, Microsoft does not provide financial information on Azure beyond percentage growth rates.

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Anmuth believes offering such information could help investors choose to bet on Google, as it allows them to see how different GCP is from Alphabet’s other businesses.

“We believe Google’s decision to further break out Cloud reflects how different Cloud is from the other businesses, & may suggest it is marginally profitable on a GAAP operating income basis,” Anmuth said in a note.

Raymond James analyst Aaron Kessler said he was basing his overweight rating and price target hike to $1,800 from $1,700 on the stock on “solid long-term advertising revenue growth expectation driven by search, mobile, and YouTube” as well as “increasing Google Cloud momentum.”

Of the profit breakout for GCP, Kessler said it “should give investors more comfort into the level of investment in the segment, as well as more clearly elucidate the margins in the company’s core advertising business.”

Barclays analyst Ross Sandler, who has an overweight rating and hiked his price target to $1,900 from $1,800, said the return to pre-COVID-19 growth rates for Alphabet’s ad business and “relatively easy comps looking ahead, should go a long way towards clawing some of that performance back. “

“The recovery in growth rates for Search and YouTube is broad-based, but likely fueled by e-commerce and direct response, and the trend line heading into 4Q is even more robust,” Sandler said.

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That’s despite comments from Alphabet Chief Financial Officer Ruth Porat on the Thursday conference call that there was “uncertainty in the external environment” as far as the company’s outlook goes. Alphabet did not provide specific numbers for its fourth-quarter outlook, while analysts surveyed by FactSet expect earnings of $15.21 a share on revenue of $52.4 billion. Anmuth said Porat’s comment about uncertainty “warrants close monitoring.”

Of the 43 analysts who cover Alphabet, 39 have buy or overweight ratings and four have hold ratings, with an average price target of $1,883.16 following target hikes by 24 analysts, according to FactSet data.

For the year, Alphabet shares are up 22%, compared with a 0.5% gain in the S&P 500 index SPX, -1.60% and a 21% gain in the tech-heavy Nasdaq Composite Index COMP, -2.52%.

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