A handful of major tech stocks will report their latest quarterly results around the end of January and the beginning of February. One of the reports I'll be watching closely is the one from Alphabet (GOOG -1.26%) (GOOGL -1.30%) -- the parent company of Google. The company has seen impressive growth in revenue and earnings per share recently even as the stock price has tumbled from highs close to $1,300 per share last summer to about $1,090 at the time of this writing.
Alphabet's fourth-quarter earnings release, scheduled for Feb. 4, will give investors a chance to look over the company's latest results and assess whether the stock's recent sell-off has gone too far, potentially making the search giant a buy.
Ahead of Alphabet's fourth-quarter update, here's a preview of three areas that investors will want to watch.
1. Revenue growth
Though Alphabet stock is trading significantly lower than it was last summer, shares still trade at a premium. The stock currently has a price-to-sales ratio of about six and a price-to-earnings ratio of 26. With valuations like these, Alphabet needs to keep delivering strong, steady growth for years to come. This is why investors should keep an eye on Alphabet's revenue growth, to be sure the company's growth trajectory remains healthy.
In Alphabet's third quarter of 2018, revenue increased 22% year over year in constant currency. This was a slight deceleration from constant-currency revenue growth of 23% in both the first and second quarters of 2018. While this deceleration is small enough that it shouldn't concern investors, a more meaningful deceleration in the coming quarters could be a concern.
On the other hand, investors should be sure to zoom out and view trends over extended periods; too much attention on quarter-to-quarter fluctuations could lead investors to focus too much on the trees and not enough on the forest. If revenue decelerates meaningfully for three or more quarters in a row, however, it may be time to revisit growth expectations for the company.
On average, analysts expect Alphabet to report revenue of $39.15 billion, implying 21.1% year-over-year revenue growth. Investors should look for Alphabet's top-line growth to come in at this level or higher.
2. The Google Other segment
Most of Alphabet's top-line results are driven by the company's digital ad business, including ads on its own websites and the ads it serves on its network members' online properties. But Alphabet's Google Other segment is growing in importance to the company. The segment, which primarily consists of revenue from the cloud, the Android app store, and hardware, accounted for 13.8% of revenue in Q3, up from a 12.9% share in the year-ago quarter.
Making the segment even more important, it's growing rapidly. Revenue in the segment was up 29% year over year in Q3, outpacing Alphabet's consolidated revenue growth rate. Investors should look for similarly strong growth from this important segment in Q4.
3. Free cash flow
Alphabet's ability to consistently generate a significant and growing stream of free cash flow is one of the reasons investors are willing to give the search giant such a premium valuation. Defined as cash from operations less capital expenditures, free cash flow is key to creating shareholder value. Free cash flow can be used to invest in growth opportunities, make strategic acquisitions, and strengthen a company's balance sheet. In addition, Alphabet could return a portion of its free cash flow to shareholders through share repurchases and dividends.
In the company's most recent quarter, free cash flow was $7.9 billion, up 27% year over year. While the timing of capital expenditures can make this metric's growth lumpy, investors should at least look for year-over-year growth in free cash flow of 10% or greater.
Alphabet is scheduled to report its fourth-quarter results after market close on Monday, Feb. 4.
Check out the latest Alphabet earnings call transcript.