Alphabet’s Q2 Earnings: Will Revenue Growth Still be a Soft Spot?

Investors can look for fresh signs from Google parent Alphabet (GOOGL) as it reports quarterly earnings after a lackluster report last quarter. The search engine giant has lagged the broader Nasdaq so far this year.

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5 min read
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Key Takeaways

  • Alphabet shares are up 9% year to date, versus the Nasdaq’s 22% rise
  • Executives have yet to discuss the recent slowdown in earnings growth

  • Wall Street is eyeing margins, which slipped last quarter from the previous quarter

Google-parent Alphabet (GOOGL, GOOG), a tech giant trailing the broader market, reports quarterly earnings after the closing bell July 25. Perhaps investors may get some fresh news to give the stock more momentum after a sluggish quarter these past few months.

Several Wall Street analysts have cited the lack of transparency as a main concern with the company last quarter. So, maybe now executives may offer some clarity around earnings trends, whether or not there’s signs of revived growth this time around. We’ll have to see.

GOOGL is expected to report adjusted EPS of $11.30, up from $4.54 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $38.17 billion, up 16.9% from $32.6 billion a year ago.

Where Q1 Results Triggered Concerns

Last quarter, GOOGL reported earnings of $11.90 per share, higher than the $10.61 the Street expected. But its revenue of $36.34 billion, which included decelerating ad revenue, fell nearly $1 billion short of expectations.

Alphabet revenue was up 17% year over year in Q1, which is substantial, however it’s off from the more than 20% consistent revenue growth it had been seeing, including 20% growth in the year prior. Furthermore, its ad revenue grew 15%, paling in comparison to the 24% growth the year prior.

It was the slowest sales growth the company has seen since 2015, but executives did not directly address the subject on its conference call. Instead, they focused on pockets of significant growth in the company such as areas of mobile search, cloud and YouTube.

Shares of GOOGL the past quarter have not been up to the torrid pace of the Technology sector. They’re up close to 9% as of July 24, whereas the tech-heavy Nasdaq (COMP) has gained 25% during that same time. Just before its Q1 report, GOOGL was up 24% year to date hitting record highs, so it’s losses since have been significant. Although keep in mind that shares have made some recovery in the last month.

What to Consider Watching in the Numbers

One of GOOGL’s key metrics is its paid clicks, which show whether traffic volumes are growing. A larger audience can help offset any price reduction in ads. Last quarter, paid clicks were up 39% year over year, which again sounds like a lot until you consider that they were up 66% in the prior quarter and up 62% in the quarter before that. The company’s finance chief attributed the slumping growth to changes they company made in its YouTube user experience. So, keep your eye out for whether growth in paid clicks made any recover in Q2.

Also, consider watching GOOGL’s traffic acquisition costs, which are mainly what it pays companies to be the default search engine or for other ways of generating traffic to its website. In recent years, the company has been able to keep this figure fairly stable, even beating analysts’ expectations last quarter when it reported $6.8 billion for the metric.

Margins, which were lackluster last quarter, may also be in the spotlight. Q1 profit and operating margins shrunk as it invested more in hiring and YouTube as well as data centers. We’ll see whether those costs are continuing to balloon, or whether GOOGL has scaled back there.

Finally, take a look outside of GOOGL’s main search engine business for how its other endeavors like its cloud computing, hardware businesses and new video streaming service Stadia are faring. Or maybe watch for what else it may have in the pipeline, say with driverless cars or other innovations that could drive growth.

As a side note, consider digging a bit deeper to look at how much GOOGL is spending on its cloud business as it tries to compete with Mircrosoft Azure and Amazon Web Services, which are dominating that market. If history is any indication, that cost should be a pretty good part of its overall costs, and this quarter’s figures will reveal whether those costs are increasing or not.

Alphabet Options Activity

The options market has priced in an expected share price move of 4.3% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. 

Options activity has been light in both the Class A (GOOG) and Class C (GOOGL) shares. There has been some put activity at the GOOGL 1120 and 1125 strikes, but the highest concentration has been way to the upside, in the GOOGL 1200 calls. The implied volatility sits at the 41st percentile as of today. 

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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Key Takeaways

  • Alphabet shares are up 9% year to date, versus the Nasdaq’s 22% rise
  • Executives have yet to discuss the recent slowdown in earnings growth

  • Wall Street is eyeing margins, which slipped last quarter from the previous quarter

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