Alphabet Earnings Preview: Ad Market Muscle Driving Growth Despite Probes
Investing.com | Feb 03, 2020 15:41
* Reports Q4 2019 results on Monday, Feb. 3, after the close
* Revenue expectation: $46.91 billion
* EPS expectation: $12.51
When the search-engine giant and Google's parent, Alphabet (NASDAQ:GOOGL) reports its quarterly earnings tomorrow, it has to show that its powerful ad machine is still running strongly enough to produce double-digit revenue growth. And, as the company faces one of the most intense antitrust probes of our times, this has become more important than ever.
So far, there's no sign that spending on digital advertising is weakening. For that reason, analysts expect 19% growth in Google’s sales to $46.91 billion in the fourth-quarter when compared to the same period a year ago.
Indeed, the shares have gained 28% in the past 12 months and 7% since the start of 2020 alone. They closed Friday's session at $1,432.78.
Investors are bullish on Alphabet's prospects: the company’s cloud business doubled its revenue run rate from $1 billion to $2 billion per quarter between February 2018 and July 2019. There is no doubt that Google’s new advertising opportunities are vast, especially in units like video platform YouTube and the ubiquitous Google Maps app.
But as the company ramps up its spending on these initiatives, the Trump administration and 50 attorneys general are undertaking wide probes into Google, including whether it has an unfair advantage over smaller advertising rivals.
The Justice Department’s antitrust chief, Makan Delrahim, said in the past quarter that a breakup of Silicon Valley’s technology giants is “perfectly on the table” as part of evaluations opened over the summer of whether companies abuse their market power.
h2 Google’s New Businesses/h2As investors begin to worry about a recent general slowdown in advertising revenue growth, competitive losses to Amazon.com (NASDAQ:AMZN) and Facebook (NASDAQ:FB) and the increasing regulatory overhang, we remain positive on Google because of its attractive valuation and generous portfolio of assets waiting to be unlocked.
The company, with its strong financial muscle, is at the forefront of new technology innovations that will fuel future growth and could help diversify its revenue away from the ad business. In particular, self-driving car technology presents the greatest opportunity of all for Alphabet.
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In our view, Google is a company with a strong moat that is almost impossible to challenge. More than 90% of all internet searches take place through Google and its subsidiary, YouTube. Everyday, Google processes 3.5 billion searches that make its platform the most valuable for advertisers.
This means companies have little choice but to advertise on Google's platform. Because of its huge internet presence, the mammoth search engine dominates the digital advertising market with 40% control of the market globally.
At the same time, It’s almost impossible to predict the outcome of these regulatory probes and their impact on Google's business. But if history offers any clue, such probes usually end up with a large fine and the imposition of changes to the company’s internal practices. Google has dealt with both in Europe recently, without losing any market share there.
Bottom Line
Google has the financial power and future growth strategy to deal with any upcoming challenges from regulatory actions and increased competition. The noise created by the latest antitrust probes, in our view, shouldn’t detract investors from what it has to offer.
With its traditional growth drivers remaining unchallenged and the company positioning itself to grab a major slice of various new growth areas, it’s a no-brainer to stick with your Alphabet holdings.
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