Earnings preview: For Google it’s time to look beyond search

Alphabet (GOOGL, GOOG) will be reporting results for the most recent quarter on October 25 after the closing bell. According to the Wall Street estimates, the internet conglomerate that owns search platform Google will report revenues of $34.04 billion for the September quarter, representing a 22.6% year-over-year increase. The strong top-line, nearly 90% which comes from the ad business, is expected to push up earnings by 8.7% to $10.40 per share.

Google, like its tech peers, has been under fire from regulatory agencies for unethical business practices such as data misuse. With regulation becoming more and more stringent, especially those involving the ad segment and the Android operating system, it is speculated that the way internet search works would change drastically in the coming years.

Google has been under fire from regulatory agencies for unethical business practices such as data misuse

That explains Alphabet’s gradual shift to the cloud business and gadget production – with extra focus on the emerging market – amidst the growing demand for feature-rich smartphones and AI-assisted home devices. Moreover, the company’s autonomous transport division Waymo is on track to achieve profitability in the near future.

Going by the shift in revenue trend, this time the market will be more interested in ‘Other Revenue’ than ever before, which was the fastest growing operating segment in the June quarter. Underscoring that view, the management in the previous earnings call sounded bullish about Google Play and Cloud, apparently buoyed by the rapid adoption of artificial intelligence by enterprises that migrate to cloud.

Alphabet stock gains as Q2 earnings surge past estimates

Google’s earnings surged 32% year-on-year to $11.75 per share in the second quarter when higher ad sales lifted margins. When adjusted for the multi-billion penalty slapped by the European Union (EU) for allegedly abusing Android, net profit increased and topped expectations supported by a 26% revenue growth.

Meanwhile, the headwind that limits margin growth is getting bigger with every passing quarter – traffic acquisition costs – adding to the stress created by the uncertainties in the search division.  Of late, expenses, including investments in assets, have been increasing at a faster rate than revenues.

Also see: Alphabet Q2 2018 Earnings Conference Call Transcript

Google shares, which reached a peak in July, rose 10% over the past twelve months, which is in line with the gains registered by the S&P Index. The stock traded higher throughout Monday’s regular session.

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