A month has gone by since the last earnings report for Alphabet (GOOGL - Free Report) . Shares have added about 1.5% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Alphabet due for a pullback? 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 Earnings & Revenues Beat Estimates in Q4
Alphabet Inc.’s non-GAAP earnings of $12.77 in the fourth quarter of 2018 surpassed the Zacks Consensus Estimate of $11.08 per share. The reported earnings decreased 2.2% sequentially but increased 31.6% year over year.
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 $31.84 billion, up 17.2% sequentially and 23.1% year over year.
Also, net revenues surpassed the Zacks Consensus Estimate of $31.28 billion.
However, Alphabet’s share price was down 3.10% in the after-hour trading session, following fourth-quarter results. The decrease can be attributed to ongoing rise in expenses on video content and cloud computing, lower operating margins, coupled with concerns about regulatory scrutiny.
The company stated that Google Cloud is recording substantial revenue growth, reflecting ongoing momentum in the business.
Primary drivers of the Google business haven’t changed. Yet, pricing remains under pressure, both on account of nagging FX concerns, coupled with continued strength in mobile and TrueView.
Nonetheless, Google continues to enjoy strength in the mobile platform. 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, which remains a strong contributor to the company’s growth, is benefiting from improvement 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
Gross total revenues of $39.3 billion increased 16.4% sequentially and 21.5% year over year (up 23% in constant currency or CC). The increase was primarily driven by strength in mobile search. Also, healthy growth in cloud, YouTube and desktop search aided its revenues.
The segment includes search, advertising, Play, hardware, and Cloud & Apps.
Coming to the search business, revenues from Google-owned sites were up 12.3% on a sequential basis and that of partner sites increased 14.6%, resulting in an increase of 12.7% in total advertising revenues.
Google-owned and partner sites grew 21.5% and 12.5%year over year, respectively, accounting for 68.8% and 14.3% of the company’s quarterly revenues.
Per management, mobile search continues to benefit from improvement in ad formats. Hence, management remains optimistic about search revenue growth on both tablets and desktops.
Other revenues increased 39.8% sequentially and 30.7% year over year, accounting for 16.5% of fourth-quarter revenues.
Other Bets Segment
In the fourth quarter, Other Bets revenues were $154 million, up 5.5% sequentially and 17.6% year over year, accounting for 0.4% of the total revenues.
Total traffic acquisition cost or TAC was up 13% sequentially and 15.3% year over year.
TAC paid out to network partners increased 14.7% sequentially and 7% 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 11.1% sequentially and 26.3% year over year.
Gross margin of 54.4% decreased 329 basis points (bps) sequentially and also declined significantly 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 9% sequentially and 29% from the year-ago quarter. However, Cost-per-impression on Google Network Members' properties increased 7% sequentially and 5% year over year.
Paid clicks on Google properties grew 22% sequentially and 66% from the year-ago quarter, partly driven by growing volumes of mobile and TrueView ads on YouTube. Google Impressions on Google Network Members' properties increased 7% on a sequential and year-over-year basis, each.
Operating expenses of $13.2 billion increased 26.6% year over year. Operating margin was 20.9%, down 280 bps from the year-ago quarter.
Alphabet has a solid balance sheet, with cash &cash equivalents, and marketable securities of around $109.1 billion, up from $106.4 billion in the third quarter. The company generated around $12.9 billion cash from operations in the fourth quarter and spent $7.1 billion on capex, netting a free cash flow of $5.9 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
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.
Estimates have been trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Alphabet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.