Alphabet Inc. has amassed a fortune from its phalanx of Google ad products, but this year investors should start to see more important results from other business lines such as its cloud division and self-driving car unit, according to an analyst.
is set to report fourth-quarter earnings Monday after the closing bell. While it’s unlikely Waymo, the self-driving business, had a material amount of revenue to report, it’s possible it will become visible enough this year that executives will begin to discuss its impact on the company’s earnings.
“Alphabet’s emerging businesses are likely to receive more attention this year with early Waymo monetization and other businesses such as GCP continuing to mature,” Nomura Instinet analyst Mark Kelley wrote in a note earlier this year. Kelley said that he is watching Waymo closely and, as it becomes a more important part of Alphabet’s business, hopes for additional transparency about its operations from executives.
Historically, the tech giant has been unwilling to break out revenue for its various segments — YouTube is among one of the largest sources of ad money that the company does not break out. Even Google Cloud Platform, which the company reported last year was banking $1 billion a quarter, is buried within the company’s “Other” segment.
“We see the potential for increased disclosure around such products, which should increase comfort in some of the newer revenue streams and the ability to use a sum-of-the-parts framework as a second-check valuation methodology,” Kelley wrote. He has a $1,350 target price and a buy on the name.
The “Other” segment within Google is where Alphabet’s largest non-ad businesses aside from Cloud reside: Play Store sales and its consumer hardware business. The company launched a new line of Pixel phones in the fall, among other gadgets, and investors should watch for executive commentary around its performance during the holiday quarter.
While Google-manufactured phones have never sold anywhere near as well as Apple Inc.’s
iPhone, reviews of the Android-based devices were largely favorable. And the company made an announcement at CES last month that it’s assistant software will be available in a billion devices, most of which are not made by the company itself.
What to expect
Earnings: Analysts polled by FactSet on average predict third-quarter earnings of $7.64 billion, or $10.86 a share, up from losses of $4.35 a share in the year-ago quarter. Adjusted for the impact of changes to the U.S. tax code, earnings were $9.70 in the fourth quarter a year ago, though. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict Alphabet earnings of $11.49 a share.
Revenue: Without accounting for traffic-acquisition costs — the fees Alphabet pays to bring people to Google’s various properties — analysts model sales of $38.9 billion, up from $25.97 billion a year ago. Analysts model $7.63 billion worth of TAC costs in the fourth quarter. Estimize contributors predict sales of $31.41 billion, after accounting for TAC.
The vast majority of Alphabet sales are from Google’s advertising products, but analysts predict Google’s “Other” segment — which includes its cloud computing division, hardware sales and Play Store — will generate sales of $6.43 billion. Other bets, the segment Google reserves for its more experimental units, is expected to report sales of $187 million.
Stock movement: Alphabet stock has gained 3% in the past three months, as the S&P 500
as fallen 1.3%. Alphabet stock has fallen 5.3% in the past year, as the S&P 500 index dropped 4.2%.
What analysts are saying
SunTrust Robinson Humphrey analyst Youssef Squali wrote in a Friday note that Alphabet is a “favorite stock for 2019” and that the fourth-quarter earnings should bring healthy top-line growth in the company’s search and display ad business that will result in fat profit margins. While he cautioned there were regulatory issues in the wings, Squali said that advertiser demand was strong and that users continue to use its products despite negative press over privacy and security.
Squali wrote that the company’s vast network of ads deployed across non-Google websites is becoming more important to the company’s revenue and that Pixel phones, smart speakers and Play Store sales may increase because of the holiday shopping season.
Though Alphabet itself does not break out YouTube revenue, eMarketer expects the video platform’s net ad revenue to grow 20% in 2019, to reach $11.38 billion world-wide, which is about 11% of the Google’s overall ad sales. Worldwide, eMarketer is predicting $102.43 billion in ad sales, which would give it control of 31.5% of the global market.
“At Google’s massive scale, a slowdown in ad revenue growth is to be expected, particularly in the U.S. But with talk of economic pressures on the horizon in the U.S., noticeable sluggishness in their fourth-quarter performance could warn of more dramatic slowdowns in the digital advertising market, which had been relatively insulated while the ad giant enjoyed strong double-digit growth rates,” eMarketer senior forecasting director Monica Peart said.
Barclays analyst Ross Sandler wrote he is expecting the status quo from Alphabet, placing the equivalent of a buy on the name with a $1,400 price target. Sandler wrote in a note earlier this month that “modest” weakness in ad sales in Europe and Latin America will likely be offset by strong U.S. sales and that the company’s retail ad category had a good fourth quarter. Like Squali, Sandler said that new hardware along with cloud and Play Store sales will likely add to sales.
Of the 45 sell-side analysts that cover Alphabet, 44 have the equivalent of a buy rating on the name, and one rates the company a hold, according to FactSet. The average price target is $1346, which represents a 20% upside from Friday’s closing price of $1118.62.