Alphabet earnings preview: Mobile, YouTube strength
SAN FRANCISCO — Google parent Alphabet is scheduled to announce third-quarter earnings after the market closes Thursday.
REVENUE FORECAST: Analysts expect revenue of $17.99 billion excluding payments to advertising partners, up from $15.11 billion in the year-ago period.
EARNINGS FORECAST: Earnings, excluding some items, are expected to increase to $8.60 a share from $7.35.
DIGITAL ADVERTISING HEGEMONY: Pivotal Research Group analyst Brian Wieser says Google and Facebook are "unambiguously the hegemonic players in digital advertising." Advertising accounts for about 90% of Alphabet's revenue.
"The world of digital advertising can be neatly divided into Facebook, Google and everyone else," Wieser said in a research note.
Analysts share that enthusiasm. More than 90% of them recommend buying the stock, three say to hold it. A handful of analysts has a price target of $1,000 or more on the stock. Only one, Wedbush Securities analyst James Dix, cut his rating on Alphabet last month to a sell.
An Ad Age and RBC Capital Markets survey found that "Google continued to be the largest platform for online advertising dollars and future intents to spend on skewed positively," analyst Mark Mahaney said in a research note.
MOBILE AND VIDEO SURGE: Buoying investor sentiment: Google's command of the mobile search market. As people spend more time on smartphones, they are clicking on more Google ads. Those clicks rose 29% in the second quarter.
Mobile ads are less lucrative for Google than desktop ads so the average amount advertisers are paying Google each time someone clicks on an ad has declined. But mobile ad prices are starting to increase. In the second quarter, cost per click fell 7% from a year ago versus 9% in the first quarter.
YouTube video ads are also a very bright spot for Google. RBC Capital Markets says YouTube is nearing a $10 billion run rate and experiencing year-over-year growth in the range of 30% and 40%.
"Expect mobile search to again be the #1 growth driver," said Jefferies analyst Brian Fitzgerald. "Comps will get tougher here as we lap the introduction of the third mobile paid-ad slot in 3Q'15. We continue to believe online video is the biggest online ad growth driver and YouTube is the premier vehicle to play that trend."
GOOGLE CLOUD BET: Analysts are keeping a close eye on other revenue, particularly its Google cloud business to compete with Amazon and turn on another revenue spigot other than advertising. In the second quarter, Google's other revenues rose 33% to $2.17 billion from a year ago. Analysts are expecting a similar increase in the third quarter.
OTHER BETS: There are signs of trouble in Alphabet divisions outside of Google. The executive who ran the Google Fiber unit stepped down this week as the company halted rollout of the super-speedy Internet and announced layoffs. Nest's Tony Fadell left in June. In the second quarter, Alphabet's "other bets" generated $185 million in revenue and lost $859 million.
HARDWARE BETS: Analysts are keeping a close eye on Google's investments in hardware, artificial intelligence and virtual and augmented reality. Sales of Google's new Pixel smartphones and Google Home speaker won't be reflected in the third-quarter numbers.
NEW STOCK BUYBACKS COMING?: Mahaney thinks so. His reasoning: In the second quarter Google completed its repurchases but did not announce a new plan. "We would be surprised if Google did not announce a new share repo plan before the end of 2016," he said. Google has $78.5 billion in cash on its books. Its last stock buyback ended in the June quarter.
Nomura Securities analyst Anthony DiClemente agrees. "Our analysis shows that Alphabet could support a meaningful expansion of its buyback program," DiClemente wrote in a research note.