Did Google’s Cloud Focus Mitigate Advertising Revenue Headwinds In Q2?

by Trefis Team
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Alphabet (NASDAQ:GOOG), Google’s parent company, is scheduled to report its Q2 earnings on Thursday, July 25. The tech giant had reported an earnings beat in Q1 despite missing market expectations on revenue owing to weakness in advertising revenues. Secular industry changes that have been at work over the last several months are likely to weigh on Google’s advertising revenues again in Q2, and the situation is likely to be made worse by unfavorable forex changes. In addition to commentary on privacy-led product changes, we will also be looking for incremental disclosures on Google’s cloud business as a part of its earnings announcement.

Trefis estimates Google’s valuation to be $1,286 per share, which is roughly 15% ahead of the current market price. We capture trends in Google’s Earnings over recent quarters in an interactive dashboard along with our forecast for full-year 2019. You can modify any of the key drivers to visualize the impact of changes on the company’s share price estimate. Additionally, you can see more Trefis technology company data here.

A Quick Look At Google’s Revenues

Google primarily makes money through online advertising, purchase of digital content on Google Play, sale of hardware and sales of cloud subscription (Google Cloud Platform and G Suite). Google’s total revenue ($136 billion in 2018) can be attributed to the following three segments:

  • Google advertising ($116 billion in 2018 revenues, contributing 85% to total revenues): Segment revenues were derived from online advertising across Google’s own websites and from placement of ads across third party websites.
  • Google other ($20 billion in 2018 revenues, contributing ~15% to total revenues): Segment revenues were derived from the sale of digital content on Google Play, hardware and sale of cloud subscription.
  • Other Bets ($1 billion in 2018 revenues, contributing <1% to total revenues): This segment houses all of Google’s incubation projects and bets on nascent technologies.

Summarizing Trends In Google’s Revenues and Income Over Recent Quarters

  • Google Advertising revenues reached $116 billion in 2018 from $79 billion in 2016. The change of $37 billion between 2016-18 implied an annualized rate of 21%, and was driven primarily by a 23% annual growth in Google properties revenues along with a slower 13% annual growth in Google Network Members’ properties revenues. Total advertising revenues in Q1 2019 came in at $31 billion (15.3% y-o-y). We expect Q2 2019 revenues to reach $32.2 billion (14.8% y-o-y). Further, we expect 2019 revenues to reach $142.4 billion (22.4% y-o-y).
  • Google Other revenues reached $20 billion in 2018 from $10 billion in 2016. The change of $10 billion between 2016-18 implied an annualized rate of 40.5%, and was fueled by rapid growth in Google’s cloud offerings. Q1 2019 revenues came in at $5 billion (25.1% y-o-y). We expect Q2 2019 revenues to reach $5.6 billion (25.9% y-o-y). Further, we expect 2019 revenues to reach $27.9 billion (40% y-o-y).
  • Other Bets revenues have fluctuated considerably over recent years. We expect 2019 revenues to be around $740 million (24.7% y-o-y).
  • Google’s Revenues (shows key revenue components) reached $137 billion in 2018 from $90 billion in 2016 – an annualized growth rate of 23% over the period. Q1 2019 revenues came in at $36 billion (16.7% y-o-y), and we expect Q2 2019 revenues to reach $38 billion (16.5% y-o-y). Google’s revenues for the full-year 2019 are likely to cross $171 billion (25% y-o-y).
  • Google’s Net income increased from $19 billion in 2016 to $39 billion in 2018 – indicating an improvement in net income margin figure from 21% in 2016 to 28.9% in 2018. Revenue headwinds and increase compliance costs are likely to result in the margin figure shrinking to 16.9% for full-year 2019.

We forecast Google’s EPS figure for full-year 2019 to be $41.62. Taken together with a P/E multiple of 30.5 for the company, this works out to a $1,268 price estimate for Google’s stock (shows cash and valuation analysis), which is roughly 15% ahead of the current market price.

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