Alphabet Q1: Spending Is Key Metric To Watch But Still A Tech Success Story
Investing.com | Apr 29, 2019 01:42AM ET
* Reports Q1 2019 results on Monday, April 29, after the close
* Revenue expectation: $37.34 billion
* EPS expectation: $10.53
When Alphabet Inc. (NASDAQ:GOOGL) reports its first-quarter earnings later today, there's little danger the parent of search engine behemoth Google will disappoint investors when it comes to its major cash-machine — digital ads. The Mountain View, California-based company, which enjoys a duopoly in the digital ad market with the social media giant Facebook (NASDAQ:FB), is likely to show its key advertising business is continuing to grow.
Analysts are expecting sales growth of more than 19% to $10.58 billion in the quarter, as businesses spent more on Google ads to reach their consumers online. Last week, Facebook produced robust sales growth in its ad business, showing the resilience of the online ad market despite concerns about consumer privacy and threats of regulatory action against the large social media giants, including Alphabet.
A powerful rally in the company's shares this year also shows that investors expect no less than a robust quarter, expecting its mobile search, YouTube and programmatic advertising will contribute significantly to growth. In the year in which other major tech stocks continue to lead the recovery in the broader market, Alphabet hasn't fallen behind. Its stock has surged more than 30% from its December low, hitting a new record high last week. The stock closed at $1,277.42 a share on Friday.
Despite the market's optimism about Alphabet’s overall growth, the company’s escalating costs create a major concern that could put pressure on its stock after the Q1 report.
In the fourth quarter, Alphabet saw its margins squeezed as it spent heavily to diversify its revenue base away from the ad business. Its fourth quarter capital expenditures jumped 80% to $6.85 billion. The company’s operating margin, a closely watched measure of profitability, fell to 21%, down from 24% from a year ago.
The dramatic increase in costs is due in part to rising bills from partners Google pays to distribute its search engine, and in part to the billion of dollars a year it spends on building data centers and developing new consumer hardware like its Pixel phones.
Investors are OK about ignoring the spending as long as the company’s margins are improving, but a continuing degradation in this key measure will definitely ring an alarm bell. Especially because the company doesn’t disclose much about its newer initiatives. YouTube numbers, for example, are included in Google sales, while cloud and hardware results are part of the company’s “Other” revenues segment.
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Bottom Line
These short-term risks aside, Alphabet continues to be a great success story in the technology space. The company is successfully riding through the new privacy rules in Europe that seem to have had a limited impact on the company’s ad business there. As well, its spending on the new areas of digital economy, such as cloud computing and driverless cars, has positioned it to maintain its leadership. We recommend to long-term investors to buy Alphabet stock if it shows some weakness after today's earnings report.
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