Alphabet Stock: Will Alphabet Inc (GOOGL) Report A Beat During Q3 Earnings?

  • The market expects Google to post 17% Y-o-Y revenue growth.
  • The internet advertising industry is expected to grow at an average annual rate of 11.1% through 2020.
  • Can Google continue the trend they’ve set for 2016? And what of Google Fiber?

Alphabet Inc-C (NSDQ:GOOG), Google’s parent corporation, had two blowout quarters this year, reporting 17% and 21% growth (yOY basis) in the first two-quarters. Naturally, the market is expecting them to continue that trend, with Wall Street analysts expecting consensus EPS of $8.63 on revenues of $22.04 billion.

Alphabet reported $18.7 billion in revenues during third quarter 2015, which means the market is expecting Alphabet to hit 17%+ year-over-year growth when Alphabet reports its third quarter results on October 27 after the market close.

Alphabet’s strong results in the last few quarters have enormously helped its stock price, which surged by more than 17% in the last twelve months, and any earnings beat will allow that momentum to continue.

Despite Alphabet trying its hand in many different areas in the past, the company still depends on its advertising business - fueled by its dominant search engine - for a bulk of its revenues. The company also recently joined the cloud race, competing with Amazon and Microsoft, but the fact that the company is yet to report standalone numbers for the segment clearly shows that their cloud revenues have not yet reached a level that would make the company comfortable in releasing those numbers.

The State of the Online Advertising Industry

Google’s advertising business growth has been solid in the last ten years, a trend that has continued this year as well. There is the threat of Facebook slowly gaining traction, but with just $17 billion in annual revenues last year, Facebook still needs a few more years to catch up with Google. Even if they get close, the growth in the digital advertising market is such that it can easily accommodate two large companies fighting with each other. In fact, now Verizon is squarely in the picture as well with its key acquisitions, AOL and Yahoo.

As per a recent report by consulting firm PWC, internet advertising has already overtaken TV advertising and is expected to grow at 11.1% CAGR to reach $260 billion by 2020, while mobile advertising is expected to accelerate at 19.6% CAGR.

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Clearly, there is plenty of room for growth and, as the yet-undisputed leader in the market, Google will definitely be able to grow at or above the market growth rate. In addition to that, Google’s dominant position in the mobile operating system market through Android also represents a huge moat around its search advertising business.

How the Shift To Mobile Devices Is Impacting Ad Revenue Metrics

The global shift to mobile devices is already showing its effects on both Facebook as well as Alphabet's financial numbers. In the first two quarters, aggregate paid clicks have grown by 29%, while average cost-per-click (CPC) has declined by 9% and 7%, respectively. This trend has been going on for quite some time, and factors such as growth in emerging economies - where revenue earned per user is much lower than in developed countries - as well as increasing mobile search numbers are significantly impacting total paid clicks and revenue per click.

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These two metrics will be the most important ones to keep your ears open for during Alphabet’s Q3 call.

And What Of Google Fiber?

In other news, there have been several rumors swirling around about Alphabet's future action plan for its Google Fiber group. Alphabet reduced its headcount in this division in an effort to reduce cost, while also buying a wireless technology company called Webpass. The third quarter earnings call should shed some more light on the direction the company is planning to take with Google Fiber.

Overall, considering the market conditions, Alphabet should report solid results during the third quarter, keeping with the trend of the last two-quarters where aggregate paid clicks increased and cost per click declined. Alphabet stock is trading close to its 52-week high and, if they beat the earnings estimate, there is a very good chance for them to test those levels.

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Comments on this article and GOOGL stock

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Jeffrey Todd
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The concensus estimate is not the same as the market expectation.
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