Alphabet Q1 Earnings Preview: YouTube, Cloud Units Seen Fueling Sales Growth

Despite multiple regulatory probes and tightening regulations on how social media companies collect and use personal information, investors continue their love affair with Google parent Alphabet (NASDAQ:GOOGL). The stock has been the best-performing name this year among the peer group of mega cap tech giants.

Google shares, which are up more than 30% in 2021 and closed at a record high of $2,299.93 on Friday, are benefiting from clear signs that the search-engine behemoth is finally succeeding in diversifying and expanding sales from its YouTube and cloud-computing businesses.

This turnaround is promising, especially at a time when the economy is reopening, brightening prospects for a strong rebound in digital ads—the company’s core business—from sectors, such as, travel, restaurants, and tourism-related services. 

Due to this resilience, analysts expect the company’s profit per share to expand about 60% to $15.70 when Google releases its first-quarter earnings tomorrow. Sales during the period are likely to surge 25% to $51.38 billion when compared with the same period a year ago.

In a recent note, Bank of America characterized Google as a top reopening stock, predicting even higher revenue acceleration in the second quarter, even “while many large-cap Internet company revenues are decelerating.”

Diversification Accelerating/h2

With the recovery in the digital ad market accelerating, it’s also encouraging for investors to see that the company’s efforts to diversify sales away from its search-engine business are paying off. Google Cloud brought in $13.06 billion in revenue in 2020. 

Jefferies analysts, in a recent note, said the search giant’s cloud business saw a sharper acceleration than Amazon's (NASDAQ:AMZN) cloud unit, Amazon Web Services, while JPMorgan valued the cloud business at $246 billion in an April report.

YouTube, another high-growth business, saw its sales soar 46% in the last quarter of 2020, as advertisers flocked to the video-sharing platform amid the pandemic. The company said the platform now reaches more users between the ages of 25 and 49 than all cable networks combined.

Morgan Stanley analyst Brian Nowak believes YouTube is “the most-undervalued ad platform” in the internet sector. With a strong recovery in the branded and direct response ad market, YouTube is well positioned to deliver 40%+ revenue growth in 2021, he wrote in a recent note.

These bullish analysts have so far ignored the many antitrust probes imposed against Google. Many states, as well as the US Department of Justice, filed multiple antitrust lawsuits against the company last year, accusing Google of illegally monopolizing internet search and search advertising through a series of anti-competitive contracts and conduct.

For the time being, investors are ignoring these legal challenges, which could take years to conclude. 

Bottom Line

With its core ad business remaining unchallenged and its revenue diversification picking up, Google is likely to post strong earnings this year. Its shares may see more upside in the days to come.