Alphabet Just Posted a Jaw-Dropping $112 Billion Profit. Here’s the Catch.

Alphabet (GOOG -0.88%) (GOOGL -0.96%) is one of the world’s largest companies, and it posted one of the most profitable quarters in history. It delivered an incredible $112 billion in net income. However, that comes with a big asterisk.

In Q2, Alphabet generated $120 billion in revenue. It’s nearly impossible for a company to turn almost a 100% profit margin, and that’s exactly the case here. So, what’s the catch with Alphabet’s most profitable quarter ever?

Image source: Getty Images.

SpaceX helped Alphabet out in the quarter

Alphabet was an early investor in Space Exploration Technologies, more commonly known as SpaceX. This was obviously a massive success story and made Alphabet a ton of money when it went public. However, under accounting rules, Alphabet must report any investment gains as net income, even if it didn’t sell. As of June 30, Alphabet’s SpaceX position totaled $94.1 billion. That accounted for a majority of its net gain on securities of $99 billion for the quarter, but not all of it.

This will cut both ways, as Alphabet’s net income will take a hit when SpaceX’s stock declines. Since June 30, when Alphabet’s Q2 ended, SpaceX’s stock has declined by over 30%. If SpaceX’s stock remains depressed throughout Q3, Alphabet’s net income in Q3 will be negatively impacted.

Today’s Change

(-0.96%) $-3.45

Current Price

$354.30

Key Data Points

Market Cap

$4.3TMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.

Day’s Range

$353.78 – $358.90

52wk Range

$196.59 – $408.61

Volume

19.9M

Avg Vol

33M

Gross Margin

60.94%

Dividend Yield

0.24%

So, just because Alphabet posted one of the most profitable quarters for any company, ever, doesn’t mean that it’s all sustainable. However, don’t write all of Alphabet’s quarter off as just a one-time boost from SpaceX.

Instead, investors should also look at Alphabet’s operating income, which excludes investment gains. If you solely look at that, Alphabet’s operating income rose an impressive 30%, one of its better quarters over the past three years.

GOOG Operating Income (Quarterly YoY Growth) data by YCharts

I think this is probably the best metric to look at while the SpaceX gains are digested throughout a year of results, and any company that’s growing its operating income at a 30% clip is worth considering, as that’s far faster than the average business grows. This growth rate could accelerate for the foreseeable future as well, thanks to the strength of AI spending.

Alphabet’s fastest-growing division, Google Cloud, saw its revenue rise 82% year over year and posted an operating margin of 35.6%. Companywide, its operating margin was 34%. Having a fast-growing division that’s more profitable than the company as a whole is a recipe for success as an investor. I think Alphabet will continue to beat expectations as long as AI spending increases. With that being the general outlook for the foreseeable future, I’m bullish on Alphabet’s stock and think it will easily crush the market over the next few years.