Shares of the tech giant are trading roughly flat over the past three months despite its exceptional Q3 report in October -- an update that saw the company confirm it now has eight products that each boast at least 1 billion monthly active users. So now's a great time to touch base and learn exactly what we should expect to see from Alphabet this time around.
On strong growth, rising costs
First, note Alphabet does not provide specific quarterly financial guidance. But three months ago, CFO Ruth Porat did remind investors Alphabet's cost of sales will rise disproportionately in the fourth quarter relative to the rest of the year, a consequence of seasonal trends in the hardware business with higher sales and marketing expenses during the holidays. Planned content acquisition costs at YouTube will also exacerbate this trend.
To that end -- and though we typically don't pay close attention to Wall Street's demands -- perhaps it should come as no surprise that analysts' consensus estimates predict Alphabet's quarterly revenue will climb roughly 20.5% year over year, to $38.94 billion, translating to a more modest 12% increase in earnings per share, to $10.86.
Check out the latest Alphabet earnings call transcript.
Breaking it down
Second, Alphabet will break down its results into two distinct segments: Google and "Other Bets."
The latter is comprised of a group of early-stage businesses that mostly operate in the pre-revenue phase. Still, Other Bets revenue last quarter climbed nearly 25% year over year to $146 million, driven mostly by its Fiber high-speed internet and Verily life sciences products. In the process, these companies incurred a consolidated operating loss of $727 million -- a sum Alphabet is happy to fund given their staggering long-term potential. That said, listen closely for any juicy updates or milestones from management on their other Other Bets businesses, such as the Waymo self-driving vehicle business and the Google Ventures and CapitalG investment arms.
Meanwhile, Google will generate the vast majority of Alphabet's revenue (Google sales climbed 21.5% last quarter, to just under $33.6 billion) and operating income (up 10.6% last quarter to roughly $9.5 billion). After all, the Google segment includes not only the company's namesake internet search engine, but also products like Gmail, Chrome, Maps, YouTube, Android, the Google Play store, Google Cloud, Nest (smart thermostats and the like), and the Made by Google hardware line (think its Pixel smartphone line and Google Home devices). Investors should be particularly interested to see how the latter two categories fared during the 2018 holiday season.
Still, most of Google's revenue will come from advertising -- ad sales rose 20.3% last quarter, for example, to nearly $29 billion. Watch for Alphabet to break down its ad performance into revenue from Google's own properties (up 22% to $24.05 billion in Q3) and sales from network members' sites (up 12.9% last quarter to $4.9 billion).
Ideally, growth in traffic acquisition costs should scale at roughly the same rate, if not slower. And Google will elaborate with additional metrics like paid clicks (up 62% in Q3) and cost per click, which helps measure how much Google is making per ad. But don't be surprised if cost-per-click measures decline (it fell 28% last quarter), in part due to faster growth at YouTube, where ads reach viewers earlier in the purchase funnel and usually monetize at lower rates.
Don't hold your breath for specific revenue or earnings guidance for the first quarter or full-year 2019. Rather, listen for management to provide updates on items like significant planned capital expenditures, operating expense trends, and the broader state of both the online advertising market and Alphabet's various supplemental businesses. If the market likes what Alphabet has to say, it might well be exactly what the stock needs to resume its longer-term rise.