What Are Alphabet’s Key Sources of Revenue?
Alphabet (NASDAQ:GOOG, GOOGL) reported consistent growth in revenues over the past three years. However, its margins declined in 2017 as fines imposed by the European Commission impacted profitability. Alphabet’s revenues from Google’s ad business remains its key source of revenue and profitability. Currently, we project that Alphabet’s revenues will grow to $128 with search ads from Google making up 71% of the total. While we project that margins will improve in 2018, Google’s margins will grow to 45.6% and make up 75% of Alphabet’s EBITDA. As a result, Alphabet’s non-GAAP EPS will grow to $46 in 2018 and the forward PE for the company is nearly 24x at the current price of $1094. We have created an interactive dashboard that illustrates how Alphabet’s revenues and margins have trended in the last three years and how we expect the company to perform in 2018. You can modify drivers such as revenues and EBITDA margin for each division to see how they will impact Alphabet’s EPS and stock price.
Google Online Ads Will Remain The Cash Cow
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Currently, we forecast that Alphabet’s revenues from Google’s properties will grow to $91 billion in 2018 due to the following reasons:
- Google’s enhanced campaigns continue to drive ad volumes as it bundles ads across screens (desktop, mobile, tablets) and categories (display and search). This means that more advertisers will come to Google’s search engine to launch their campaigns.
- Google introduced deep links in 2015. This has enabled the company to make more information in the app searchable. Through deep links, the company has been able to monetize in-app information and report growth in revenues.
- Google, through YouTube, has an excellent presence in the online video ad market. YouTube is increasingly moving towards high-quality content from low-quality, user added videos. It continues to launch new video ads formats. As a result, YouTube’s monetization rate is improving and this would boost Google’s revenues in 2018 and in the coming years.
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