Alphabet Inc Earnings Preview: Will Google’s Newer Bets Pay Off?

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October 24, 2016 12:26pm Nasdaq:GOOG Nasdaq:GOOGL

Alphabet logoFrom Zacks: Alphabet Inc. (NASDAQ:GOOGL) will report third-quarter 2016 earnings on Oct 27 after the bell, so let’s take a look at what could go right and wrong this quarter for Google’s parent company.

The company’s Zacks Rank #2 (Buy) and Earnings ESP of 0.00% make surprise prediction difficult. That is because, per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) to beat estimates.

We don’t recommend Sell-rated stocks (Zacks Rank #4 and #5) going into the earnings announcement.

In Alphabet’s case, the surprise history hasn’t been much impressive, since the company has missed estimates in two of the last four quarters, although by a small margin.

What Happened Last Quarter

Alphabet’s second-quarter earnings surpassed the Zacks Consensus Estimate on revenues that also beat estimates. On the Google side of things, year-on-year revenue growth was attributable to paid click growth of 29% that offset continued price declines. Mobile, YouTube, TrueView, Google Preferred, and Play Store sales were the other positives. Other Bets revenues remained lumpy.

ALPHABET INC-A Price and EPS Surprise

ALPHABET INC-A Price and EPS Surprise | ALPHABET INC-A Quote

What to Expect in Q3

Revenues from Other Bets are likely to remain uneven because of the early stages of most businesses included in it. Nest, Fiber and Verily were revenue contributors in the last quarter. Investments remain focused mainly on Fiber efforts.

The main drivers of the Google business haven’t changed. Pricing remains under pressure, both on account of the ongoing FX concerns as well as continued strength in mobile and TrueView. Volumes in the second quarter were very encouraging however. Total paid click growth of 29% was also an encouraging number.

Google has gained strength in the mobile platform. Accelerated Mobile Pages (AMP) has been a key driver with the company indexing 150 million AMPs so far, adding 4 million a week from across 200 countries. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals as a result of studying mobile searches from its huge database. As a result, direct response marketers remain interested in it.

The company has greater control on the browser through Android as well as through distribution agreements with Apple. But upcoming threats shouldn’t be ignored either: Apple may not renew its agreement, Microsoft (MSFTFree Report) Windows 10 could steal overall search market share, Facebook Graph search and the social network itself could take away advertising dollars, and Amazon already takes care of most product searches.

YouTube remains a very strong contributor benefiting from the increase in online video consumption. More than a thousand creators are currently engaged with the platform bringing in a thousand subscribers every day. Also significant is the $2 billion it has paid out to partners to date.

Google’s cloud business trails Amazon’s AWS, Microsoft’s Azure and also IBM. But Google has turned more aggressive, hiring Dianne Greene to run things.

And finally, Google platforms like Android, Chrome and Daydream continue to help the company draw more users and sell more ads.

Cash and Investments continue to pile up with 61% ($48 million) residing overseas. Management clearly wants to keep investing because there is so much room for growth in Other Bets.

On a cautionary note, Google’s troubles in the EU are mounting and despite its attempts to appease authorities by investing in the region, it may finally prove much more expensive for the company. Google is not providing for this outflow, which could mean that it still has a reasonable chance to come out victorious. But the developments are worth keeping an eye on and the main reason for the overhang on the shares.

Alphabet shares rose $12.64 (+1.53%) to $836.70 in Monday afternoon trading. Year-to-date, GOOGL has gained 7.48%, versus a 5.34% rise in the benchmark S&P 500 during the same period.

This article is brought to you courtesy of Zacks Research.

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