- Reports Q4 2018 results on Monday, February 4, after the close
- Revenue expectation: $31.28 billion
- EPS expectation: $11.08
For a company as big as Alphabet (NASDAQ:GOOGL), the parent of search engine behemoth Google, its quarterly earnings report should be the perfect venue for impressing investors. However, if Alphabet's third quarter results provide any indicators, this won’t be an easy task for the company's management when it reports Q4 earnings later today.
Analysts on average expect profit to grow 14% to $11.08 a share. Sales could jump over 20%, capping the busiest quarter for internet companies since it encompasses the holiday shopping period as well as Black Friday and Cyber Monday.
Tougher Growth Trajectory, Sluggish Shares
More than half of marketing dollars spent in the U.S. last year went to digital ads, an arena that Google and Facebook (NASDAQ:FB) continue to dominate, Eric Sheridan, an analyst at UBS wrote in a recent note. But despite the promising economic environment and strong consumer spending, it’s becoming increasingly tough for tech giants to maintain the rapid pace of revenue growth that used to be their premier selling point.
Indeed, Amazon (NASDAQ:AMZN), which reported earnings last Thursday, showed some signs of weakness on these metrics and was roundly punished by investors. The e-tailer said last week that its fourth quarter revenue rose nearly 20% from a year earlier, which topped analysts’ expectations, but was still the company's weakest growth since early 2015. Investors sent Amazon shares tumbling more than 5% on Friday.
In its third quarter report, Google said sales from the company’s own properties, including YouTube and search pages, rose 22%. That was slower than the 26% growth it reported in the prior quarter. In our view, anything less than an expansion of 20% in Google’s sales growth in today's release will be taken as a bad sign for the company’s shares, which closed Friday at $1,118.62. The stock is already struggling to break out of the sluggish cycle its been in amid social media data controversies and regulatory scrutiny across the sector.
There's an additional worry in the case of Google. There's reason for concern regarding its rising costs to bring in more sales. The company is paying more to partners that distribute its search engine, while at the same time it’s spending billion of dollars a year to build data centers to develop and market new consumer hardware like its Pixel phones.
One bright spot that could boost both sales and the company’s future outlook is its success in the lucrative cloud computing market . The company is number 3 in this arena, behind Amazon and Microsoft (NASDAQ:MSFT).
During Q3, Google’s 'other revenue' bucket, which includes cloud, hardware and app sales, grew 29%. Alphabet’s most promising other bet is its Waymo autonomous vehicle unit, which after racking up 10 million driverless miles in testing, launched commercially in Phoenix last month for a select group of people.
That will be a major step for a business that’s mostly been an expensive R&D project for a decade. Morgan Stanley recently estimated an enterprise value of as much as $175 billion for this division.
Bottom Line
Google’s wide moat, its enduring competitive advantage and its growth initiatives—including cloud computing and driverless cars—make its shares an attractive long-term addition to any portfolio. But in order for the stock to gain further momentum, the company needs to show that these new areas of growth are quickly becoming big enough to diversify its revenue base away from just selling ad space. That will be the key focus of investors when they will scrutinize Alphabet’s Q4 numbers on Monday.