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Although it has some weaknesses, the third quarter report of the Alphabet (GOOGL) has nothing to say for investors – especially where the shares traded before generating profits.
Thursday after the bell, Google's parent company reported a business turnover of $ 33.74 billion (up 21% a year) under third-quarter GAAP and earnings per share of 13.06 dollars. Excluding a $ 1.20 increase in accounting changes related to equity investments, earnings per share were $ 11.86, which was still well above a consensus of 10 $ 41. However, revenues did not reach the consensus of $ 34.1 billion.
Excluding traffic acquisition costs (TAC), sales amounted to $ 27.16 billion, slightly below consensus of $ 27.32 billion.
Alphabet Class A and C shares are down about 3%, while Nasdaq lost 2%. The fact that unlike Amazon.com (AMZN), which recorded a 53% increase in its revenue for the third quarter, Alphabet had only grown about 5% in 2018 at the close of Thursday, seems to limit the damage.
Likewise, after weighing all the positives and negatives, Google's overall performance is not that bad.
As CFO Ruth Porat pointed out at the earnings call, currency fluctuations (ie a strong dollar) were a major stumbling block in the third quarter. After increasing its sales figure by 26% in dollars and 23% in constant currency (CC) in the second quarter, Alphabet's business turnover grew by 21% and that of dollars and 22% in CC in the third quarter. Analysts are well aware of the recent strengthening of the dollar, but some may have underestimated the magnitude of its impact on third-quarter sales.
In addition, thanks to strong growth in mobile search and YouTube advertising, Google has announced that its advertising clicks on its own websites and apps, which account for the lion's share of its ad revenue, have increased by 62% per year. year. It's actually up 58% in the second quarter and 59% in the first quarter.
This growth was partially offset by a 28% drop in average ad price, or CPC, down from 22% in the second quarter and 19% in the first quarter. The drop in CPC has a lot to do with the fact that on average, mobile search ads and YouTube ads have lower prices than PC search ads.
However, in a long-term perspective, I think it's much better that Google experience a strong growth in the number of paid clicks, partially offset by a significant drop in ad prices rather than the opposite. As the business optimizes the effectiveness of mobile search and YouTube ads, it is important to target the right users, to measure the impact ads or convert ad clicks into activities such as shopping, email registrations and app downloads. – Ad prices for both platforms are likely to improve.
At the same time, pressures on TACs, which have been a major negative factor in recent quarters, eased slightly in the third quarter. Unlike the past quarters, the TAC was stable as a percentage of Google's advertising revenue (23%). The fact that Google seems to have surpassed the first anniversary of its first contract with Apple (AAPL) has made Google its default search engine for the Safari browser and iOS search feature, with Apple apparently greatly reducing advertising revenue in return – seems to help.
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In the future, the recent EU decision relating to Android, which is currently the subject of a Google remedy but which will be applied in the meantime, could result in a TAC increased spending in the EMEA region, which accounted for 32% of Google's revenue for the third quarter. By allowing smartphone builders not to pre-install Google Chrome and Search on their Android devices if they wish, this decision could allow them to request significant revenue reductions from search-related ads in exchange for Pre-installation of applications
That being said, CEO Sundar Pichai downplayed the impact of the decision on Google in the near term, noting that any revision of the terms of the deal would only affect the phones sold, indicating that the popularity of Google's services (its share of research in Europe is close to 90%) gives it some weight. "[Changes are] It will take time to reach users, "he said. And it is difficult to predict how the licensing model will be adopted. "
For now, Google reacts to this decision by charging Android builders $ 10 to $ 40 per device in the EU to install the Play Store and non-Chrome apps and Search, then offering to cover all or part of these costs if an OEM-install Chrome and Search. Time will tell what are the conditions of the final transaction.
There are some other potential barriers to watch for Google investors. Macroeconomic pressures – exacerbated by trade tensions – could affect sales of advertising in some markets. Aggressive spending could also weigh on results: Google's operating expenses grew by 26 percent a year in the third quarter, and its capital expenditures reached $ 5.3 billion, compared to $ 3.5 billion a year ago. a year. And, even if it's worth remembering that e-commerce is just one of the many vertical advertising sectors that Google supports, and that the company runs rather Well, the rapid growth of Amazon's online advertising sector deserves to be observed.
Nevertheless, Search and YouTube still seem well positioned to generate healthy growth in the coming years, as advertising revenue continues to move towards online channels. And between Google Maps, Waymo, the Play Store, Hardware Sales, G Suite and the Google Cloud Platform (GCP), the company also has several other companies that probably have a lot of growth to achieve, and that could be collectively producing no profit for the moment.
In this context, multiples of Google's expected earnings – equities trading about 23 times higher than their consensus in 2019 EPS – remain quite reasonable, even though third-quarter revenues were slightly below expectations.
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