Alphabet Earnings Preview: Google TAC, Other Revenues and Waymo

Tech giant Alphabet (GOOG, GOOGL) reports third-quarter earnings after market close on Thursday, Oct. 25. Here’s a look at what might be expected from the company’s report.

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Alphabet (GOOGL, GOOG) will be sharing the earnings stage with Amazon (AMZN) later today, as both are set to report after the closing bell on Thursday, Oct. 25. 

It hasn’t exactly been an easy stretch for GOOGL lately. As to be expected, analysts have expressed some concerns about Amazon (AMZN) and Apple’s (AAPL)  increased focus on advertising. GOOGLhas been appealing the EU’s $5 billion fine. And it disclosed a security bug in its Google+ social network that allowed unauthorized access to user data—it decided to shut down Google+ shortly after news of the breach became public. 

In October, the company announced that it would be unbundling its Android operating system from the Google apps and create a mix of free software and paid licenses, a move that is supposed to help address the EU’s concerns. 

Regarding the EU fine, GOOGL booked the charge the last time it reported, so its impact won’t be reflected in this quarter. 

For Q3, GOOGL is expected to report adjusted EPS of $10.42 on revenue of $34.04 billion, according to third-party consensus analyst estimates. In the same quarter last year, adjusted EPS came in at $9.57 on revenue of $27.77 billion. 

Google TAC

Traffic acquisition costs, or TAC, are what Google pays to partner websites to show ads on their properties. This is a sizable expense for the company that totaled $6.42 billion in Q2 2018, 23% of Google’s total advertising revenues.

Many analysts have expressed concerns in recent quarters that this number has trended higher over time and grown to eat up more advertising revenue. Shifts towards mobile and programmatic advertising have been the main culprits that management has blamed for higher TAC in the past, although in the last report they did say there were some improvements in programmatic that helped lower TAC rates there.    

In Q3, consensus analyst estimates call for $6.76 billion in TAC. 

Other Revenues and Other Bets

GOOGL’s other revenues encompasses everything from Cloud, Play, Hardware to Wing and Loon, which were part of other bets up until recently. In Q2 2018, other revenues increased 37% year over year to $4.7 billion, and it has continued to become a more important part of the business. Consensus analyst estimates call for $4.8 billion in revenue from GOOGL’s other revenues. 

Other bets is GOOGL’s division that, like it sounds, are bets the company is making that are losing money now, but they hope will become larger businesses down the road. In Q2 2018, this division generated $145 million in revenue and an operating loss of $732 million. Analysts have indicated that they are expecting pretty similar results from this quarter. 

Waymo

Waymo, GOOGL’s self-driving car division, has been one of the “Other Bets” divisions that many investors and analysts have been focused on. On last quarter’s call, it was a main topic of discussion.  

By the end of 2018, GOOGL has said that it plans to launch a commercial car service in Phoenix, which CFO Ruth Porat called a first step to build out broader program in the future. Management also indicated it will continue to focus on developing relationships with vehicle manufacturers. Some of the automakers the company has announced it is working with include Fiat Chrysler (FCAU) and Jaguar. 

Up and Down. Yesterday’s drop put GOOGL back in the red for 2018. The stock was down 1.5% year to date at yesterday’s close, but shares jumped higher at the open today and are up slightly on the year.  The stock is still down quite a ways from the all-time high of $1291.44 it hit back in July. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Alphabet Options Trading Activity

This morning, GOOGL was rebounding after yesterday’s broad sell-off that hit tech hard. However, with some of the action over the past few days, a lot could change by the time U.S. markets close.  

Around the earnings release, options traders have priced in about a 5% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. As of this morning, implied volatility was at the 100th percentile. 

Looking at the Class A Shares (GOOGL), there has been a mix of options activity all over the place at the Oct. 26 weekly expiration. On the call side, there has been higher volume at the 1100 strike price, while there has just been a smattering of activity mostly right around the money. 

At the Nov. 16 monthly expiration, a bulk of the activity on both the call and the put side has been at the 1100 strike. Other than that, there’s been smaller volumes spread out across a range of strikes, mostly right around the money. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,

JJ

@TDAJJKinahan

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