Alphabet Earnings Preview: Mobile, Video Ads To Drive Revenue Growth
Alphabet Inc. (NASDAQ: GOOG, GOOGL) is set to announce its Q2 2017 earnings on July 24th. For Q2, we expect that Google continued to dominate the online search ad market and its revenues improved as ad volumes increased, offsetting likely declines in cost per click. Google continued to sell more ad inventory through its programmatic platform, which is driving aggregate paid clicks and revenues across both the PC and mobile verticals. Furthermore, its TrueView video ads for YouTube will continue to improve as advertisers continue to leverage the platform to market products. This should boost revenues for the YouTube platform. In the smartphone industry, Android remains an extremely popular OS, which should drive Google Play store content revenues in Q2. However, the company’s “Moonshot” projects continued to bleed cash, albeit at a slower rate.
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Search Ad Volumes To Bolster Revenue Growth Despite Decline In CPC
Trefis currently estimates that Mobile search ads and PC search ads contribute 44% of 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 programmatic platform has impacted CPCs, as has the DoubleClick Bid Manager, which monetizes at lower rates than ad clicks on Google.com. Search ad revenues are also facing headwinds from changing geographical mix, device mix, currency fluctuations and property mix. This has had a negative impact on revenues. However, search queries have increased driven by steadily growing mobile traffic. As a result, the search ad revenues have improved despite the decline in CPCs across both mobile and PCs.
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YouTube Ads To Add To Top Line
Trefis currently estimates that YouTube Ads contribute nearly 18% of 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 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 buying decisions by watching videos about products before making purchases. Going forward, YouTube will be an important growth driver for Google, as online video ads are expected to grow exponentially. The company also launched YouTube Tv in Q1, and this should further boost revenues for the platform.
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 $244 million and operating losses of $855 million for Q1. Other Bets accrued lower capex of $170 million as the company reduced its investment in Fiber due to the pause in expansion announced in Q3 2016. Over the past few quarters, Alphabet has been scaling back its investments in these money-losing “moonshot” ventures to rein in costs and make these businesses accountable for their operations. Despite these efforts, we believe that the segment will continue to bleed cash in Q2 and 2017, albeit at a slower rate.
We currently have a $893 price estimate for Alphabet, which is 10% below the current market price.
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