Shares of the Google and YouTube parent Alphabet (GOOG , GOOGL) have fallen 31% year to date, underperforming the 23% decline in the S&P 500 index. The stock has fallen 13% and 24% in the respective three months and six month, while only slightly outperforming the losses in the tech-heavy Nasdaq Composite during that span.
The tech conglomerate is due to report third quarter fiscal 2022 earrings results after the closing bell Tuesday. Amid various macroeconomic concerns such as rising inflation, the company has also suffered a slowdown in digital advertising. This is likely to persist given the recent drop in Snap (SNAP), which recently released results of a brutal third quarter that missed Street's estimates. That said, execution hasn’t been an issue for Google.
In the last two years, the company’s quarterly reports have beaten revenue estimates for eight consecutive times, while missing on profit estimates just once in that span. For this quarter, however, the Street forecasts a 9% year-over-year drop in EPS, while revenue is estimated to grow at about 8.5% compared to the same quarter in 2021. Digital advertising, which includes YouTube ads, Search ads and Network ads, remains the company's major revenue and profitability driver. Google's advertising business grew 12% last quarter to $56.3 billion.
It remains to be seen whether the advertising segment can begin to recover on Tuesday. Assuming prolonged slowing trends in the digital ad business, investors will look to see if Google’s cloud business, which currently accounts for less than 10% of total revenues, can be a strong offsetting factor. That said, given the market’s flight to quality, investors who are looking for companies that have strong qualities such as sustainable revenue and earnings growth, solid cash flows and strong balance sheets can still do well here.
For the quarter that ended September, Wall Street is looking for the Mountain View, Calif.-based tech giant earn $1.26 per share on revenue of $70.68 billion. This compares to the year-ago quarter when earnings came to $1.40 per share on revenue of $65.12 billion. For the full year, ending in December, earnings are expected to decline 9% year over year to $5.11 per share, while full-year revenue of the $287.96 billion would rise 11.8% year over year.
The year-over-year projections for both revenue and profits are not as robust as investors have become accustomed to in previous quarters. However, the downbeat numbers underscore how the company has had to navigate recessionary pressures to sustain growth within its three operating segments. While Google Services remains the company's bread-and-butter business, accounting for some 90% of consolidated revenues in 2021, Google Cloud Platform and Google Workspace are starting to show strong acceleration.
The company’s cloud revenue rose close to 50% year over year in 2021. While Amazon (AMZN) Web Services (30% market share) and Microsoft’s (MSFT) Azure (20% market share) are the two leading cloud providers, Google Cloud is gaining ground with 9% share. The slowing ad business, meanwhile, is likely to persist judging by Snap's results. It’s also possible that Alphabet has weathered the storm, and Snap’s results are its own to deal with and may show no carryover to Google.
In the second quarter, YouTube ad revenue rose 5% year over year to $7.34 billion, while Google advertising was up 11% at $56.28 billion. Q2 Cloud revenue was also impressive, rising 36% to $6.27 billion. This led to a 13% rise in total Q2 revenue to $69.68 billion. However, the Cloud segment posted an operating loss of $858 million, which contributed to the miss on adjusted EPS of $1.27. Along with improved Q3 ad revenue, the Cloud segment will be closely-watched by investors on Tuesday for sustained growth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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