Google Doubles Down On Its Cloud Bet After Advertising Headwinds Hurt Q1 Results

by Trefis Team
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Alphabet (NASDAQ:GOOG) reported its Q1 earnings earlier this week, and the company beat consensus expectations on earnings despite missing market expectations on revenue due to weakness in ad revenues. The management attributed this miss to forex headwinds over the quarter, and warned that this is also likely to weigh on the top line in Q2. While the company maintained that its cloud business continues to see momentum and remains a priority investment area going forward, Google hasn’t been very forthcoming when it comes to disclosing details about the size of its cloud business. However, we believe that Google’s cloud business can potentially generate $20 billion in revenues by 2020.

Per Trefis estimates, Alphabet’s share have a fair value of $1,268. Our interactive dashboard on Google’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation, and see more Trefis technology company data here.

For Q1, key takeaways are below:

  • Google advertising: Revenue grew to $30.7 billion (+15% y-o-y)
    • Google properties: Revenue grew to $27 billion (+17% y-o-y)
    • Google Network Members’ properties: Revenue grew to $5 billion (+8% y-o-y)
  • Google Other (cloud, hardware and play) revenue grew to $5 billion (+25% y-o-y)
  • Total Google segment (advertising plus other) revenue grew to $36 billion (+17% y-o-y)
  • Other Bets: Revenue grew to $170 million (+13% y-o-y)
  • Total revenue grew to $36 billion (+17% y-o-y)
  • The quarter also included the impact of the EU fine of $1.7 billion
  • The management noted that the weakness in ad revenues could be attributed to tougher comparable versus 2018, forex headwinds and timing of product changes. We note that part of this weakness can also be attributed to advertiser budgets shifting to Amazon – a trend that is likely to hurt Google’s ad revenues over coming months.

With revenue headwinds expected in the near future, and with the management avoiding any details about progress in the cloud space while also side-stepping questions about the long-term impact of privacy regulations on revenues, investor sentiment took a hit after the results were announced. The resulting sell-off sent the company’s stock down almost 8%.

We forecast Alphabet’s EPS figure for full-year 2019 to be $41.62. Taken together with our forward P/E multiple of 30.5 for the company, this works out to a $1,268 price estimate for the company’s stock, which is roughly 5% ahead of the current market price.

Do not agree with our forecast? Create your own price forecast for Google by changing the base inputs (blue dots) on our interactive dashboard.

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