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Alphabet (GOOGL) Down 3.2% Since Last Earnings Report: Can It Rebound?
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It has been about a month since the last earnings report for Alphabet (GOOGL - Free Report) . Shares have lost about 3.2% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is Alphabet due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Alphabet Q2 Earnings and Revenues Beat Estimates
Alphabet Inc.’s non-GAAP earnings of $11.75 in the second quarter of 2018 surpassed the Zacks Consensus Estimate of $9.51. Also, earnings increased 19% sequentially and 135% year over year.
The Internet powerhouse reported decent top-line numbers. Net revenues, excluding total traffic acquisition cost or TAC (TAC is the portion of revenues shared with Google’s partners, and amounts paid to distribution partners and others who direct traffic to the Google website) came in at $26.2 billion, beating the Zacks Consensus Estimate of $25.64 billion.
The company stated that Google Cloud is generating substantial revenue growth, reflecting ongoing momentum in the business.
Primary drivers of the Google business haven’t changed. Pricing remains under pressure both on account of nagging FX concerns, and continued strength in mobile and TrueView.
Google continues to enjoy strength in the mobile platform. One of the drivers is Accelerated Mobile Pages (AMP), which is being accepted by a number of publishers and sites across the world. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals by studying mobile searches from its huge database. As a result, direct response marketers continue to show interest in it.
YouTube continues to remain a strong contributor, benefiting from growth in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day.
Finally, Google platforms like Android, Chrome and Daydream continue to help it in drawing more users, and selling more ads.
Numbers in Detail
Revenues
Gross total revenues of $32.7 billion increased 4.9% sequentially and 25.6% year over year (up 23% in constant currency or CC). The increase was primarily driven by strength in mobile search. Also, healthy growth in network revenues, hardware, cloud and Play aided revenues.
Google Segment
The segment includes search, advertising, Play, hardware, and Cloud & Apps.
Coming to the search business, revenues from Google-owned sites were up 5.7% on a sequential basis, while that of partner sites increased 3.9%, resulting in an increase of 5.4% in total advertising revenues. However, Google-owned and partner sites grew 26.3% and 13.6%year over year, respectively, accounting for 71.2% and 14.8% of quarterly revenues.
Management stated that mobile search continued to benefit from improvement in ad formats, as well as remained optimistic about search revenue growth on both tablets and desktops.
Other revenues increased 1.6% sequentially and 36.5% year over year, accounting for 13.5% of second-quarter revenues.
Other Bets Segment
In the second quarter, Other Bets revenues were $145 million, down 3.3% sequentially but up 49.5% year over year, accounting for 0.4% of the total revenues.
Total traffic acquisition cost or TAC was up 2.1% sequentially and 26.1% year over year.
TAC paid out to network partners increased 0.7% sequentially and 12.1% year over year. Given that mobile search carries higher TAC, the increase in mobile search revenues is driving related TAC, according to management.
TAC for distribution arrangements was up 3.7% sequentially and 46.9% year over year.
Net advertising revenues, excluding TAC, were up 6.5% sequentially and 23.2% from the prior-year quarter.
Margins
Gross margin of 57.5% increased 73 basis points (bps) sequentially but decreased 263 bps from the year-ago quarter.
Price declines remained negative in year-over-year comparisons, as the mix continued to move toward lower-margin business.
Cost per click (CPC) on Google sites was down 10% sequentially but up 22% from the year-ago quarter. However, Cost-per-impression on Google Network Members' properties increased 7% sequentially and 14% year over year.
Paid clicks on Google properties grew 15% sequentially and 58% from the year-ago quarter, partly driven by growing volumes of mobile and TrueView ads on YouTube. Google Impressions on Google Network Members' properties decreased 4% sequentially but increased 1% from the year-ago quarter.
Operating expenses of $10.9 billion increased 24.3% year over year. Operating margin was 8.6%, down 730 bps from the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $102.3billion, slightly down from $102.9 billion in the first quarter. The company generated around $10.1 billion of cash from operations in the second quarter and spent $5.5 billion on capex, netting a free cash flow of $4.7 billion.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
VGM Scores
At this time, Alphabet has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is suitable for growth and momentum investors.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Interestingly, GOOGL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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Alphabet (GOOGL) Down 3.2% Since Last Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for Alphabet (GOOGL - Free Report) . Shares have lost about 3.2% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is Alphabet due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Alphabet Q2 Earnings and Revenues Beat Estimates
Alphabet Inc.’s non-GAAP earnings of $11.75 in the second quarter of 2018 surpassed the Zacks Consensus Estimate of $9.51. Also, earnings increased 19% sequentially and 135% year over year.
The Internet powerhouse reported decent top-line numbers. Net revenues, excluding total traffic acquisition cost or TAC (TAC is the portion of revenues shared with Google’s partners, and amounts paid to distribution partners and others who direct traffic to the Google website) came in at $26.2 billion, beating the Zacks Consensus Estimate of $25.64 billion.
The company stated that Google Cloud is generating substantial revenue growth, reflecting ongoing momentum in the business.
Primary drivers of the Google business haven’t changed. Pricing remains under pressure both on account of nagging FX concerns, and continued strength in mobile and TrueView.
Google continues to enjoy strength in the mobile platform. One of the drivers is Accelerated Mobile Pages (AMP), which is being accepted by a number of publishers and sites across the world. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals by studying mobile searches from its huge database. As a result, direct response marketers continue to show interest in it.
YouTube continues to remain a strong contributor, benefiting from growth in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day.
Finally, Google platforms like Android, Chrome and Daydream continue to help it in drawing more users, and selling more ads.
Numbers in Detail
Revenues
Gross total revenues of $32.7 billion increased 4.9% sequentially and 25.6% year over year (up 23% in constant currency or CC). The increase was primarily driven by strength in mobile search. Also, healthy growth in network revenues, hardware, cloud and Play aided revenues.
Google Segment
The segment includes search, advertising, Play, hardware, and Cloud & Apps.
Coming to the search business, revenues from Google-owned sites were up 5.7% on a sequential basis, while that of partner sites increased 3.9%, resulting in an increase of 5.4% in total advertising revenues. However, Google-owned and partner sites grew 26.3% and 13.6%year over year, respectively, accounting for 71.2% and 14.8% of quarterly revenues.
Management stated that mobile search continued to benefit from improvement in ad formats, as well as remained optimistic about search revenue growth on both tablets and desktops.
Other revenues increased 1.6% sequentially and 36.5% year over year, accounting for 13.5% of second-quarter revenues.
Other Bets Segment
In the second quarter, Other Bets revenues were $145 million, down 3.3% sequentially but up 49.5% year over year, accounting for 0.4% of the total revenues.
Total traffic acquisition cost or TAC was up 2.1% sequentially and 26.1% year over year.
TAC paid out to network partners increased 0.7% sequentially and 12.1% year over year. Given that mobile search carries higher TAC, the increase in mobile search revenues is driving related TAC, according to management.
TAC for distribution arrangements was up 3.7% sequentially and 46.9% year over year.
Net advertising revenues, excluding TAC, were up 6.5% sequentially and 23.2% from the prior-year quarter.
Margins
Gross margin of 57.5% increased 73 basis points (bps) sequentially but decreased 263 bps from the year-ago quarter.
Price declines remained negative in year-over-year comparisons, as the mix continued to move toward lower-margin business.
Cost per click (CPC) on Google sites was down 10% sequentially but up 22% from the year-ago quarter. However, Cost-per-impression on Google Network Members' properties increased 7% sequentially and 14% year over year.
Paid clicks on Google properties grew 15% sequentially and 58% from the year-ago quarter, partly driven by growing volumes of mobile and TrueView ads on YouTube. Google Impressions on Google Network Members' properties decreased 4% sequentially but increased 1% from the year-ago quarter.
Operating expenses of $10.9 billion increased 24.3% year over year. Operating margin was 8.6%, down 730 bps from the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $102.3billion, slightly down from $102.9 billion in the first quarter. The company generated around $10.1 billion of cash from operations in the second quarter and spent $5.5 billion on capex, netting a free cash flow of $4.7 billion.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
VGM Scores
At this time, Alphabet has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is suitable for growth and momentum investors.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Interestingly, GOOGL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.