Earnings season is hitting the peak of its excitement with 3 out of the 4 FANG stocks reporting this week. The market has had been responding relatively positively to Q2 earnings thus far with the S&P 500 hitting new all-time highs today. Alphabet GOOGL AKA Google, the search engine that runs the internet for 90% of humans, is reporting its earnings after the bell Thursday, July 25th.
GOOGL has been a relatively big mover on earnings reports, with the last 6 reports having a 4.5% average price impact. Sell-side analysts are estimating an EPS of $11.50, which would represent an over 2% decline. GOOGL has beaten that last for EPS estimates by double-digit percentages so it wouldn’t surprise me if this upward surprise trend continued.
Revenues are estimated at $30.9 billion for Q2, which would illustrate a 17.8% topline expansion. Revenue growth is GOOGL investors’ biggest concern with its most recent deceleration having a significant adverse effect on the company’s share price.
Changes in paid clicks is also a key metric to evaluate when examining Alphabet’s 2nd quarter 10-Q. This quarter is expected to see a 38% increase in paid clicks on Google properties compared to Q2 last year. The big miss on this metric last quarter was one the catalysts that led to the sharp stock price decline.
Q1 Earnings Recap
Google’s Q1 results were released at the end of April, beating EPS estimates by 12.5% but missing on revenue. GOOGL fell over 6% following this release and has continued to fall since. Investors are concerned with the deceleration of topline growth, specifically ad revenue.
Year-over-year (YoY) revenue growth for Q1 was 16.7%, the first time this figure has been below 20% in 3 years. Ad revenue dropped to 15.3%, lower than it has been in over two years.
Alphabet’s paid clicks grew only 39% YoY for Q1, down from the 50 to 60 percent growth range it attained in the prior year. CFO Ruth Porat commented on the matter, explaining that the “vast majority of total clicks” are from YouTube and that the growth slowdown is due primarily to this subsidiary.
YouTube is still not represented in Alphabet’s financial statements as a separate entity, making it difficult to quantify its deceleration. Alphabet is quite taciturn when it comes to specific segment data. They only quantify segments under broad group umbrellas.
“Google Cloud Platform remains one of the fastest growing businesses in Alphabet, with strong customer momentum, reflected in particular in demand for our compute and data analytics products,” says Alphabet’s CFO Porat. Their cloud segment along with Play and Hardware are all within ‘Google other revenues’, which saw 25% YoY growth.
Google has a big bet on its cloud computing segment, which some analysts are predicting could bring anywhere from $17-$20 billion in annual revenue by next year.
Cloud technology is an exceedingly competitive space, and Google is contenting in this space with best in class companies like Amazon AMZN, Microsoft MSFT, and IBM IBM. Google is behind in market share and will need to continue to invest significant amounts to remain a key player in the space.
The slowing ad growth illustrated in Alphabet’s Q1 earnings release has investors anxious about priced in growth. The anti-trust probe that’s been haunting the tech industry has GOOGL shareholders concerned as well, with the firm having been investigated in the past.
GOOGL is only up 9% year-to-date underperforming the S&P 500 by a significant amount. The share price is down over 5% since the Q1 earnings release.
With all of the worry surrounding GOOGL, its valuations have been hampered. GOOGL is trading close to the stocks lowest forward P/E multiple which it had just bounced off of last month.
Google has been under fire since its Q1 earnings report, which illustrated a deceleration in advertising revenue. The plateauing ad sales leave the other business segments to pick up the slack. Google has a big bet on its cloud computing segment, which some analysts are predicting could bring anywhere from $17-$20 billion in annual revenue by next year.
While looking at Alphabet’s 2nd quarter results watch for a topline beat as well as a beat in YoY paid clicks growth, both of which would ease investors’ concerns about slowing ad revenue.
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