Google-parent Alphabet Inc. (GOOGL - Free Report) is set to report third-quarter earnings results today, after market close. The tech major has been performing really well of late. Last quarter, it came up with better-than-expected results, though its revenues were slightly lower than analysts’ expectations. Nonetheless, Alphabet’s shares have gained 21% so far this year, way higher than the Internet - Services industry’s rally of 5.3%.
But this time around, things are a bit challenging. CFO Ruth Porat believes that foreign exchange will affect the company’s third-quarter results.
By the way, last quarter’s ad sales growth increased 16.1% on a year-over-year basis, more than the first quarter’s growth of 15.3%. But, if you compare it to earlier quarters, ad sales growth are definitely declining. For instance, the company saw its ad revenues grow 19.9% year over year in the fourth quarter of 2018 and 20.3% in the third quarter of 2018.
What’s more, paid ad click for Google properties was mostly driven by mobile search and YouTube. But, both these trends are now fading. Paid click growth came down to 28% in the second quarter from 39% in the first. And it won’t be surprising if this declining trend is seen in the third quarter as well.
Other business segments that include Waymo, Google Fiber and Verily life sciences are also seeing substantially high losses. In the second quarter, these segments collectively reported an operating loss of $989 million. And in the third quarter, the consensus is that these segments will again report a collective loss of $847 million.
But, not everything is as dispiriting. Google may be facing stiff competition from Amazon.com, Inc. (AMZN - Free Report) and Microsoft Corporation (MSFT - Free Report) in the cloud computing space, but its cloud-related sales are currently doing pretty well. Lest we forget, Google, in its second-quarter conference call, had said that its cloud computing business is at an $8-billion revenue run rate, which implies that cloud sales have doubled in the last 18 months. Thus, we can expect Google to report an uptick in third-quarter cloud business revenues. Analysts now expect the company’s revenues for the third quarter to increase to $32.84 billion from $27.16 billion a year ago.
Some may say that a slowdown in TAC (traffic acquisition cost) has been a tailwind for the company in recent quarters. After all, TAC grew 13% in the second quarter, less than the total Google ad revenue growth of 16%.
However, Google’s other cost of revenues, including hardware production costs, depreciation expenses and content costs, have been exceeding revenues for quite some time. In the second quarter, other cost of revenues was up 35% to $10.1 billion. And if this trend stays, it will squeeze operating margins, and thus earnings. To put this into perspective, analysts now expect the company’s third-quarter earnings per share to drop to $12.57 from $13.06 a year ago.
In fact, Google has an Earnings ESP of -3.57%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Google currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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