Alphabet Inc. had a difficult quarter, tackling how exactly Google would handle a multibillion-dollar European Union fine, a significant hack of its little-used Google+ social network, presidential tweets and ongoing pressure from advertising rivals.
reports third-quarter earnings after the bell on Thursday, though, the search giant’s quarterly profits are expected to continue to roll in like clockwork. What remains to be seen is whether it will be able to perform better than expectations, which investors have become accustomed to and led to record highs after last quarter’s earnings.
“In-line is never good enough in this sector, companies need to beat, as expectations are always high,” wrote Barclays analyst Ross Sandler, who rates Alphabet the equivalent of a buy with a $1,415 price target. “[Alphabet] should actually be “ok” in 3Q, but we are worried about a return to steep operating margin compression.”
In Alphabet’s second-quarter report, the company handled the $5 billion EU fine, which was levied over antitrust concerns with its Android operating system. The company has appealed the ruling despite taking the charge, but now it could actually make some money from changes in response to the ruling.
In an October blog post the company said that it planned to essentially unbundle Android from the apps that used to arrive along with it: Google Search, the Chrome web browser and others such as Gmail. Google will continue to offer Android free and create paid licenses for its suite of apps, and separate free licenses for search and Chrome, instead of being bundled with the rest of the company’s mobile software.
The changes are set to go into effect Oct. 29 and it is not yet clear how much Google intends to charge, though one early report suggested Google could charge manufacturers $40 for installing apps such as Gmail and YouTube on their phones.
What to expect
Earnings: Analysts polled by FactSet on average model third-quarter earnings of $8.27 billion, or $10.42 a share, up from $9.57 a share a year ago. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict Alphabet earnings of $10.98 a share.
Revenue: After accounting for traffic-acquisition costs — the fees Alphabet pays to bring people to Google’s various properties — analysts model sales of $27.29 billion, up from $22.27 billion a year ago. Estimize contributors predict sales of $27.46 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 $4.79 billion. Other bets, the segment Google reserves for its more experimental units is expected to report sales of $173 million.
Stock movement: Alphabet class A stock has lost 6.8% in the past three months, as the benchmark S&P 500 index
fell 1.2%. The shares have gained 6% this year.
Of the 43 analysts that cover Alphabet, 39 have the equivalent of a buy rating on the stock and four rate it a hold, according to FactSet. The average target price is $1,399.34, which represents 26% upside from Monday’s closing price.
What to look for
During the third quarter, Google opted to shut down its Google+ social network after the company exposed the private data of hundreds of thousands of users. The glitch gave outside developers potential access to private data between 2015 and March 2018. After news of the bug, some U.S. lawmakers cited it as a reason that Congress needs to examine regulating tech companies more closely.
Another ongoing issue for Alphabet is the threat to its ad business posed by Amazon.com Inc.
. The e-commerce giant is well positioned to place ads before shoppers and as a result the company is growing into an ad giant.
It is not just Amazon that is coming for Alphabet’s ad money, as Apple Inc.
too is growing its ad business at a steady clip. Bernstein analyst Toni Sacconaghi wrote in a note to clients Monday that Apple will grow its App Store’s search ads into a $2 billion business by 2020, and is now selling about $500 million worth of ads. Streaming too might provide another lucrative chance for Apple to sell ads, since the Apple TV platform is believed to have many more users than streaming software maker Roku Inc.
and sells ads for a higher rate. It is also possible the company could begin to develop advertising products around Apple Maps and Apple News.
Overall, however, Google’s ad business remains a behemoth. According to eMarketer data, the company is set to generate $88.04 billion in digital ad revenue this year for a 31.5% market share world-wide. Rival Facebook Inc.
is expected to capture 19.5% of market share. Alphabet does not break out YouTube revenue, but it represents about 11% of Google’s ad revenue, or $9.49 billion for 2018, according to eMarketer.
Nomura analyst Mark Kelley wrote in a note to clients Monday that he is watching for updates on Google Cloud Platform, its hardware device sales and Waymo. Kelley has a price target of $1,400 and a buy rating on the stock.