How Will Alphabet Perform In The Second Half Of 2018 After Solid Q2 Growth?
Alphabet (NASDAQ:GOOG) announced its Q2 earnings on July 23, reporting a solid 26% increase in revenues to $32.7 billion. Much of the revenue growth came from Google’s core advertising segment, particularly on Google owned and operated properties such as Search, Gmail, Maps and YouTube. Google Properties revenues were up 26% to $23.2 billion, forming 70% of the company’s net revenues. In addition, Google Other Revenues, or revenues from selling hardware (Pixel), cloud offerings, and in-app purchases, was the fastest growing segment, with a 36% increase in revenues to $4.4 billion. Ad revenues from network partnerships were up 14% y-o-y to $4.8 billion for the quarter. Correspondingly, cost of revenues and operating expenses were up by 25-30% through the quarter, due to which operating income was up only 17% y-o-y to $8.9 billion. The company incurred a fine of $5.1 billion charged by the European Commission (EC) due to Google’s Android-related distribution agreements that infringed European competition law. Excluding the impact of of the EC fines, Alphabet’s non-GAAP diluted EPS for the quarter was up 32% to $11.75 per share.
Based on the recent results and market trends, we have revised our forecasts for Alphabet for the full year. We forecast Google Properties’ revenues to be up 23% to almost $96 billion for the year. Similarly, Google Other revenues are forecast to increase 34% to just over $19 billion. Revenues generated by Network Members’ Properties are expected to grow at a slower pace (6-7%) to just under $19 billion for the year. We expect Alphabet to maintain its revenue growth trajectory, and forecast the company’s margins to return to 2015 and 2016 levels after comparatively low margins through 2017. We have summarized our expectations for the company’s 2018 results on our interactive Alphabet full year results dashboard. You can change expected segment revenue and net margin figures for Alphabet to gauge how changes will impact its expected EPS for the year. Our forecast for the EPS for the full year is about in line with consensus estimates.
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