Personal Finance

What to Expect When Alphabet Reports Earnings

Google employees eating at the company's YouTube cafe with a large YouTube Logo in the background

OK, Google. It's officially earnings season again, and time to show investors what you're made of.

Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is set to release first-quarter 2018 results on Monday after the market close. With shares of the internet search behemoth down around 8% since it last reported in early February, now's a great time to take a closer look at what we should expect.

Google employees eating at the company's YouTube cafe with a large YouTube Logo in the background


The headline numbers

Alphabet doesn't provide specific financial guidance. But Wall Street tends to react, anyway, based on how the headline numbers arrive relative to its expectations. For perspective, consensus estimates predict that Alphabet will post quarterly earnings of $9.35 per share on revenue of $30.36 billion.

Still, keeping in mind that shares fell despite an all-around fantastic performance from Alphabet last quarter, take those figures with a grain of salt.

On Google's "second wave of growth"

To be fair, Alphabet management did admit last quarter that the costs of running its core Google segment have eaten into its profits. While revenue climbed 24% year over year, its total cost of revenues -- including traffic acquisition costs, or TAC -- grew an even faster 34%.

During last quarter's call, Alphabet CFO Ruth Porat also reminded shareholders that these investments are being made in order to drive a "second wave of growth within Google over the medium and long term" -- namely, as Google fosters high-margin cloud business, acquires content for YouTube, and invests in its thriving "Made by Google" hardware products. As these highly profitable non-advertising businesses continue to gain steam, they will help Google take some of the pressure off of its core advertising business.

That's not to say advertising can't hold its own. Recall that, in addition to hardware, YouTube, and the Play store, Google maintains a commanding market-share lead in online advertising through its massive Search, Chrome, Gmail, Maps, and Android products. As such, advertising will undoubtedly generate the vast majority of Alphabet's revenue and operating income once again this quarter.

To that end, expect Google to break down its advertising performance into both sales from its own properties (up 23.8%, to $22.2 billion last quarter) and revenue from network members' sites (up 12.6%, to nearly $5 billion in Q4). Google also will offer color on aggregated paid clicks (up 43% last quarter) and cost per click (down 14%). Note the latter -- which helps measure how much Google makes per ad -- might sound bad, but its declines are primarily caused by the fast expansion of YouTube, where Google's TrueView ads reach viewers earlier in the purchase funnel, so monetize at lower rates.

On "other bets"

We can't forget Alphabet's other bets segment, which houses its smaller businesses with massive long-term potential. Many of these businesses are in the pre-revenue stage, and consequently, the pre-profit stage.

Nonetheless, other bets revenue last year jumped a solid 49% year over year, to $1.2 billion, mostly from sales of Nest-connected home products, Fiber internet, and Verily life-sciences solutions. Those sales generated an operating loss of $3.4 billion in 2017. That might sound discouraging, but it was a drop in the bucket compared to Alphabet's consolidated annual operating income of more than $26 billion last year.

Looking forward

All things considered, I don't expect any big surprises in this report, and certainly don't think Alphabet will break its habit of not providing quarterly revenue or earnings guidance.

But I will be listening closely to ensure Porat still believes that, after TAC climbs in the first quarter as a percentage of overall Sites revenue, Alphabet's rate of TAC growth should slow down beginning in the second quarter and as the year progresses. If that turns out to be the case -- and assuming all else goes as planned -- I suspect the market will be more than pleased.

10 stocks we like better than Alphabet (A shares)

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Alphabet (A shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More