Alphabet (GOOGL) reported a strong top- and bottom-line beat on Tuesday evening for the second quarter. On the top line, revenue of $61.880 billion (+57% year-over-year constant currency) outpaced the $56.190 billion consensus. On the bottom line, earnings per share of $27.26 (+169% YoY) crushed the $19.24 per share consensus.

Total operating income of $19.361 billion blew past the $14.602 billion consensus, with an operating margin of 31% expanding from 17% in the same quarter last year and topping estimates of 26%.

"In Q2, there was a rising tide of online activity in many parts of the world, and we're proud that our services helped so many consumers and businesses. Our long-term investments in AI and Google Cloud are helping us drive significant improvements in everyone's digital experience," Sundar Pichai, CEO of Google and Alphabet, said in the earnings release.

CFO Ruth Porat said the company's strong revenue growth reflected elevated consumer online activity and broad-based strength in advertiser spend. More specifically, COO Philipp Schindler said retail was the largest contributor to YoY growth in Alphabet's ad business, while travel, financial services, media, and entertainment were strong contributors, as well.

We've always said Alphabet's large exposure to businesses that were hit hard by the pandemic such as travel has made this stock a reopening play within mega-cap tech. The results today prove that Alphabet's numbers became even stronger as the economy recovered.

The results today prove that Alphabet's numbers became even stronger as the economy recovered.

Taking a look at the business lines, revenue from Google Services -- which includes products and services such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube -- was $57.067 billion (+63% YoY) and outpaced expectations of $52.860 billion.

Breaking that number down, Google Search & other generated sales of $35.845 billion (+68% YoY) and YouTube ads generated sales of $7.002 billion (+83% YoY), topping estimates of $6.37 billion. To put some perspective around this impressive YouTube sales result, streaming giant Netflix (NFLX) generated about $7.3 billion of sales in its second quarter result. That's incredible and the growth behind YouTube is one reason why many believe the valuation of Alphabet's different "parts" broken up would be greater than the whole of the company. YouTube should continue to see strong growth as advertisers seek to reach an audience who prefers online video and streaming to linear cable. Alphabet said on the call tonight that over 120 million people watch YouTube on their TVs every month, and that's up from 100 million last year.

Combining Search with YouTube, this results in Google Web Site sales of $42.847 billion, a beat vs. expectations of $37.961 billion.

Google Network Members' properties generated sales of $7.597 billion (+60% YoY) -- better than the $6.786 billion consensus. Combining the Google Web Site sales and Google Network Members' properties sales, we get Google advertising sales of $50.444 billion (+69% YoY). It's not surprise to see Google's digital advertising business up this significantly after reviewing the numbers Twitter and Snap Inc reported this week. We view all of this as a positive read through to Facebook's earnings report tomorrow evening.

Rounding out the segment, Google other sales of $6.6623 billion was better than expectations of $6.458 billion. 

As for profitability, Google Services operating income came in at $22.343 billion, a huge beat vs. tthe $17.750 billion consensus and representing a strong 39.15% operating margin, which was in line with estimates.

At Google Cloud, revenues were $4.628 billion, representing growth of about 54% (an acceleration from 46% in the first quarter) and topped estimates of $4.468 billion. The segment reported an operating loss of $591 million, which is much smaller than the $1.187 billion loss that analysts had expected and the $1.426 billion loss this business posted ion the quarter last year.

During the conference call, Pichai called out three distinct trends that drove Cloud sales in the quarter. First was how the increase in cyber and ransomware attacks has been a "wake up call" for the industry. Pichai prided Google's history of building some of the most secure computing systems in the world. Second was Google's expertise in real-time data and analytics and how it helps differentiate them in the data cloud, which is one of the fastest growing segments in the market. Third, Pichai called out the continued strength of Google Workspace and how it is designed to meet the challenges of hybrid work.

In Other Bets, the segment reported an operating loss of $1.398 billion vs. expectations for a $1.068 billion loss, on revenue of $192 million (+29.7% YoY) vs. a $201 million consensus. In other words, this business loss reported a greater than expected loss on lower than anticipated revenue. As a reminder, this segment covers businesses such as Waymo, Google Fiber, and Verily. The miss on other bets should not move the needle when it comes to the stock price reaction. While Other Bets has been slow to develop, we believe the strength of the company's balance sheet has given management the right to invest in new industries to increase revenue diversification and avenues for longer-term growth. 

Looking at Traffic Acquisition Costs (TAC), or what Alphabet pays partners to support its advertisements, total TAC came in $10.929 billion (+63% YoY), vs. estimates of about $10 billion. However, despite the larger than expected increase, total TAC as a percentage of Google Advertising revenues was down slightly year-over-year at about 21.6%, in line with the first quarter result.

Capital and Cash Flows

On the capital expenditure side, the $5.496 billion spent in the quarter was less than the $6.584 billion estimate. Porat said on the call that Alphabet's capex spending reflects "ongoing investment in our technical infrastructure, most notable in servers, to support ongoing growth across Google.

Cash flow was strong, with net cash provided by operating activities of $21.890 billion (vs. a $19.356 billion consensus), and free cash flow (defined as net cash provided by operating activities less capital expenditures) of $16.394 billion vs. a $11.128 billion consensus.

Alphabet ended the quarter with $135.863 billion in cash, cash equivalents, and marketable securities. That's down marginally from $136.694 billion at the end of 2020.

As for the buyback plan, the company repurchased $12.796 billion worth of stock in the quarter. Additionally, the company announced its board has approved an amendment to its $50 billion share repurchase program permitting management to repurchase both Class A and Class C shares. Previously, the buyback was limited to Class C shares. As a reminder, ticker symbol GOOGL is the A line.

Bottom Line

With GOOGL shares up about 50% year-to-date, representing the best performance out of the FAANG plus Microsoft (MSFT) stocks this year, it would be easy to say expectations were elevated into the print. But with tonight's terrific quarterly result that included strong beats across all key line items with advertising (and especially YouTube) stealing the show, Alphabet proved it was up to the challenge.

What was also so refreshing about the conference call tonight was the lack of commentary around regulatory concerns. Instead of getting bogged down about how Alphabet is navigating the current regulatory environment, all the analysts were locked in asking questions about the fast-growing Cloud business, the strength of YouTube, and how large of an opportunity Google has with omni and digital shopping.

As a result, GOOGL shares were rising about 3% higher after-hours to what will be a new all-time high above $2,700 per share if the move holds. We expect the stock to outperform Wednesday, and our price target will be moving higher.