After Facebook beat, all eyes on Alphabet earnings
SAN FRANCISCO — Google parent company Alphabet reports second-quarter earnings after the market closes on Thursday. Here's what to watch.
REVENUE FORECAST: Analysts expect revenue of $20.77 billion, up from $17.7 billion a year ago, according to S&P Global Market Intelligence. Alphabet narrowly missed on the top line in April. Net revenue, excluding traffic acquisition costs, is expected to have increased 17% to $16.9 billion.
EARNINGS FORECAST: Analysts expect a profit of $8.04 a share, up 15% from a year earlier. Alphabet reported a big miss in April, causing the stock to fall 5.4% in the next session. In fact, Alphabet has missed Wall Street consensus estimates in eight of the past 12 quarters.
SEARCH ADVERTISING: Investors are keeping a close eye on trends in search advertising, Google's money-making machine. Some analysts say data from third-party firms suggest a slight year-over-year decline in search revenue growth. Wedbush Securities analyst James Dix says search checks are "mixed." He noted that MAGNA GLOBAL raised its 2016 global search growth estimates to 13.7% from 11.3%. MAGNA's June update estimated second-quarter U.S. search ad growth estimate at 12.7%, up from 11.0%, but a deceleration from 17% in the first quarter.
MOBILE ADVERTISING: Advertisers pay less for each click on mobile ads than they do on desktop computers but the growing number of clicks on mobile ads is beginning to make up for that, analysts say. RBC Capital analyst Mark Mahaney estimates that paid clicks, the number of times people click on Google ads, increased by 29% in the second quarter from a year ago. Cost per click declined 4% in the second quarter year over year, Mahaney estimates.
"Mobile clicks are likely to see increased monetization as Google continues to experiment with formats and presentation," said BGC Financial analyst Colin Gillis. He noted a recent report from IgnitionOne that said mobile spend growth in the June quarter was up 55% year over year as advertisers shifted budget to mobile ads. Mobile clicks cost on average half the price of desktop clicks. "We expect the pricing gap to close as more dollars chase into the space and click thru rates improve," Gillis said.
Monness, Crespi, Hardt & Co. analyst James M Cakmak estimates YouTube revenue at about $6 billion for the year, about 7% of gross revenue.
SPENDING RESTRAINT: With finance chief Ruth Porat aboard, Alphabet has shown greater spending restraint. Total operating expenses were about 36% of net revenue in the first quarter. Investors will be keeping a close eye on Alphabet's businesses outside of Google, those "other bets" such as Google Fiber and home-automation maker Nest. "We believe the company’s improved cost focus could drive margin expansion in the near to medium term," says Mahaney who is looking for $174 million in other bets revenue and a non-GAAP operating loss of $754 million.
EUROPEAN RISKS: Currency fluctuations stemming from Britain's vote to leave the European Union poses a risk for U.K. revenue, analyst say. Mahaney notes that Brexit is a "revenue downside risk" in the second half of 2016. Dix says Wedbush lowered estimates on "higher F/X drag from British pound."
"We expect some currency revenue headwinds in the short-term because of Brexit as the United Kingdom roughly represents 9% of revenue and Western Europe is also a significant part of Google's revenue," says eMarketer senior forecasting analyst Martín Utreras.
Also troubling investors: the widening scope of European antitrust investigations. That and a sluggish global economy have tamped down on Alphabet shares, Gillis says.
"That said, we remain highly positive on Google’s ability to monetize its large user base including seven products with over 1 billion users each, a management team driven by the company founders, a renewed sense of fiscal discipline, and our view that mobile clicks are likely to see increased monetization as Google continues to experiment with formats and presentation."