Alphabet Earnings Preview: Revenues Set To Grow Even As Moonshot Projects Bleed Cash
Alphabet Inc. (NASDAQ: GOOG, GOOGL) is set to announce its Q1 2017 earnings on April 27th. [1] For Q1, we believe that Google continued to dominate the online search ad market and its revenues improved as ad volume increased, which offset the decline in cost per click. However, the company’s “moonshot” projects continued to bleed cash, albeit at a slower rate.
For Q1, we will be closely watching display ad revenues from YouTube as the company continues to explore options to monetize this platform. Additionally, as Google continued to sell more ad inventory through its programmatic platform, which is driving aggregate paid clicks and revenues across mobile verticals, we expect the revenue contribution from mobile will increase in Q1.
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Google Revenue To Grow Despite CPC Decline
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Trefis currently estimates that Mobile search ads and PC search ads contribute over 42% to the company’s total value. For the past few years, 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. Furthermore, the search ad revenue growth is facing headwinds from the geographical mix, device mix, currency fluctuations and property mix. Furthermore, the growth of TrueView ads on YouTube and the advent of the video programming platform has negatively impacted CPCs, as has the DoubleClick Bid Manager, which monetizes at lower rates than ad clicks on Google.com. This has had a negative impact on revenues.
The increased adoption of smartphones has led to an increase in the number of mobile ads through Google’s enhanced campaigns. This has resulted in an improvement in the monetization rate for mobile ads. As a result, the company has reported considerable growth in mobile ad revenues. We believe that this trend in mobile ads will help the company post growth in Q1 and for 2017.
YouTube Ads To Add To Topline, Weigh On CPC
Trefis currently estimates that YouTube Ads contribute nearly 18.7% to Alphabet’s value. In the previous quarter, the company reported that more than 1 billion monthly users are watching hundreds of millions of hours every single day. According to the company, YouTube has become the platform of choice for major brands, with a highly engaged audience. Research also suggests that many users turn to YouTube to help make a decision about buying something by watching videos about it. Going forward, YouTube will be an important growth driver for Google as online video ads are expected to grow exponentially. 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 in Q1 and in the ensuing quarter.
However, Google is focusing on its video programmatic businesses including AdMob, AdExchange, DoubleClick Bid Manager, and these continue to grow at a strong rate. As Google is increasingly looking to monetize the video content through its programmatic platform, Trefis anticipates that CPC (Revenue per search) will continue to decline in Q1. This will likely result in lower-than-expected top line growth, although growth in search volumes will likely offset the decline in Q1.
Performance Of Other Bets
The company’s Other Bets segment, which includes Fiber, Verily, Calico, Nest, self-driving cars, and other businesses, reported revenue of $809 million and operating losses of $3.58 billion for 2016. Other Bets capital expenditures were $4.39 billion, primarily reflecting investment in the Fiber business. Over the past few quarters, Alphabet is scaling back its support for money-losing “moonshot” ventures to rein in costs and make these businesses accountable for their operations. Despite these efforts, we believe that these businesses will continue to bleed cash in Q1 and 2017, albeit at a slower rate.
We currently have a $845 price estimate for Alphabet, which is about in line with the current market price.
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