Alphabet (GOOGL +0.37%) (GOOG +0.53%), best known for its flagship Google search, has gathered momentum since its last earnings release, gaining 9%, nearly doubling the 4.6% performance of the broader market as represented by the S&P 500.
Investors will be keeping a wary eye on the numbers when the company reports the financial results for the 2018 second quarter on Monday, July 23 after the market closes. Let's take a look at how Alphabet did last quarter and review a few metrics that investors will be watching during the company's earnings report.
Image source: Google.
A look back
In its first-quarter report, Alphabet reported revenue of $31.14 billion, up 26% year over year, and exceeding analysts' consensus estimates for $30.36 billion. The company also reported adjusted earnings per share of $9.93, up 28% compared to the prior-year quarter.
It's also worth mentioning that a recently adopted accounting pronouncement (ASU 2016-01), required Alphabet to report changes to the value of its equity security investments -- like Uber. The company must report changes in the fair value of these stakes, and include the resulting gains and losses in net income -- under other income and expenses. This requirement will likely cause wild swings to net income, so it will be important to focus on operating income and adjusted earnings per share.
What to watch
One of the key metrics investors will be focused on is traffic acquisition costs (TAC). Those are the payments made by Google to partners for directing users to its search engine. Those costs have been rising as a percentage of the company's advertising revenue, most recently growing 35% year over year and accounting for 24% of ad sales, and up from 22% in the prior-year period.
Google has said that the biggest growth areas of its business -- specifically mobile search and programmatic advertising -- both carry higher TAC, thereby justifying the increasing costs, but investors have still been leery. Alphabet CFO Ruth Porat has repeatedly stated that the increasing costs were necessary to drive growth for the search giant and would continue to increase as a percentage of revenue, but the pace of year-over-year growth in TAC is expected to slow in the second quarter. Investors will be keeping a sharp eye to ensure the expected slowdown occurs.
Image source: Waymo.
Not just search
It's also important to remember that while advertising from Google search is the primary driver of the company's revenue, there are other areas that could eventually produce explosive growth, though they currently represent only a minuscule part of Alphabet's overall business.
Alphabet reports sales from Google cloud, Made by Google hardware products, and sales from its Play store in its Other Revenues category, and its Nest thermostats unit was recently added to this group. Last quarter, sales from the segment grew 36% year over year, so watch for continued strong growth in this area.
Among its Other Bets category, Alphabet houses a number of businesses that are not yet profitable, like its high-profile Waymo self-driving car segment, its life sciences division Verily, and Google Fiber. In the first quarter, Other Bets revenue grew 14% year over year, while operating losses decreased by 23%. Waymo has been increasing the size of its fleet in advance of its self-driving ride-hailing service, which is expected to launch later this year. Watch for any updates on its highly anticipated debut.
A look ahead
Alphabet doesn't provide investors with a forecast, but analysts' consensus estimates are looking for revenue of $32.27 billion, which would represent growth of 24% year over year, and earnings per share of $9.64, compared to adjusted earnings of $8.90 per share in the year-ago quarter, an 8% increase.
I expect investors will be keenly focused on the expected deceleration in TAC growth, and if that occurs, barring any unexpected developments, I think it will be business as usual for Alphabet -- and business is good.
