Alphabet To Release Google’s Earnings: Revenues Likely Increased As Mobile Takes Center Stage

Alphabet (NASDAQ:GOOG) is set to release Google’s Q3 2015 earnings on Thursday, October 22^nd. In Q3, the company reported that its revenues grew by over 11% year over year to $17.72 billion. However, cost-per-click (CPC), which has been declining for the past two years, continued to negatively impact growth. This decline was offset to some extent by the adoption of its enhanced campaigns program that combines ad marketing campaigns across mobile, desktop and laptops—i.e., across screens with different form factors. The program was instrumental in generating ad volume growth across the display and search ad divisions. Furthermore, Google management continues to look for ways to improve its mobile revenues and has recently introduced deep links for mobile apps to surface mobile content during search. It is also focusing on improving its revenues from YouTube.  In this earnings announcement, we expect the enhanced campaigns program and programmatic platform to once again drive revenue growth across its mobile and PC search ad divisions. Additionally, we continue to monitor growth in mobile search due to deep links initiative. And we expect greater clarity on nomenclature, as parent and holding-company Alphabet discusses the performance of Google and is smaller, sister businesses.

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Revenues To Increase Despite Decline In Cost per Click

We currently estimate that PC search ads and Mobile search ads respectively contribute approximately 31.3% and 37.3% to the firm’s value. The company, with a 65% market share, dominates the PC search engine market. The cost per click (CPC), a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. The primary reason for this has been both the advent of programmatic buying that matches relevant ads with content, as well as an increase in user-generated online content. As a result, company’s top line growth from search ads has failed to match the growth in search volume. Furthermore, most of the web traffic is coming from mobile devices. As advertisers realign their ad budgets in favor of mobile devices, chances are that desktop revenue per search (RPS) will suffer. Therefore, we believe the downtrend in RPS (a derivative of CPC) to continued in Q3, and expect the company to report lower RPS, accordingly. Currently, we project RPS to decline from $23 to $22 by 2022.

Even though CPC will decline due to advent of mobile usage, the company is adopting novel ways to boost revenues. It has introduced deep links for mobile apps to surface content for mobile apps. The new tool will also help boost revenue for programmers developing Android apps and streamlines the process to promote applications (and its content) across Google search. We expect that ad revenues will grow in absolute numbers buoyed by growth in search volume across mobile. Alphabet’s Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and deep penetration in the smartphone market. A user with an Android phone is more likely to use Google search compared to a user using another OS. Considering the widespread use of Android based smartphones, we expect revenues from mobile ads will have grown at a robust pace in the Q3 of 2015. Furthermore, as the multi-platform enhanced campaigns program continues to evolve and Google continues to roll out more of its ads on its programmatic platform, we expect the aggregate paid clicks to increase and boost the number of ads sold.

Video Ads To Boost Revenues From YouTube

According to our estimates, YouTube contributes approximately 3.6% to Alphabet’s value. The global online video advertising market (by revenues) is forecast to rise by 23% in 2015 to reach $13.8 billion, according to IHS (a market research firm) and Vidiro (a video analytic company). In addition, online video advertising revenues are estimated to rise to $19 billion by 2017. ^[1] According to comScore, Alphabet’s Google is the market leader in the online video content industry. The August 2015 U.S. desktop online video rankings by comScore confirm this as Google Sites (led by YouTube) saw 168.4 million unique viewers ^[2] According to comScore, Google’s sites are also ranked as one of the top video ads web properties in the U.S., reaching 31.7% of the audience. YouTube is forecast to record 3 trillion video views during 2015. Since online video remains a fast growing segment within the overall digital ad market, we expect this to translate into high-revenue growth rate for the company. We expect that the unique user count for YouTube rose during the quarter, given the increasing popularity of this platform.

We currently have a $657 price estimate for Alphabet, which is inline with its current market price.

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1. Online Video Advertising Revenue Doubles in Three Years, Says IHS and Vidiro, IHS, May 12, 2015 [↩]
2. comScore Releases August 2015 U.S. Desktop Online Video Rankings, comScore, September 25, 2015 [↩]