Google Q1 Earnings Call: What to Expect
With media attention focused on Mark Zuckerberg, some investors might have forgotten that Alphabet Inc (NASDAQ:GOOGL) is due for an earnings review on Monday, April 23, 2018. Not us, though. We’ve had the Google earnings report date fixed on our calendar for weeks.
The company is supposedly changing how it reports income, so we’re watching earnings like a hawk. Also, we think the Google Q1 earnings call should be particularly interesting because analysts are going to ask some tough questions.
Google expects this. It knows that analysts, myself included, read “changes to reporting standards” as camouflage for deeper financial troubles. That’s why notices have dripped out of the company’s PR division, foreshadowing changes to the quarterly report.
We’ve combed through those statements. Below are three highlights we consider important:
- Nest is no longer in the “Other Bets” division. Don’t be fooled if you see a burst of Google’s core revenue. There’s almost certainly an equivalent drop in its “Other Bets” revenue, owing to the fact that Google Nest revenue is being moved from one category to another. Google bought Nest Labs several years ago in order to bulk up its connected home division (WiFi-enabled thermostats, security cameras, connected speakers etc.). Nest was a leader in those products but the company’s engineering team and Google’s cult of personality didn’t work well together. There were major hiccups in the first few years. But now things are taking off; Nest revenues are surging and Google wants to highlight those improvements in its quarterly report. Hence the move.
- Does Google make smart investments? We’ll find out. According to the Accounting Standards Update 2016-01 from the Financial Accounting Standard Board (FASB), Google must now report “unrealized gains or losses” on investments. Considering that Google invests in dozens of projects, this rule change could shake up the earnings report. After all, we have no idea if Google has been a good investor. But we’re about to find out. (Source: “Financial Instruments—Overall (Subtopic 825-10),” FASB, last accessed April 23, 2018.)
- Google is changing its advertising metrics. Rather than showing how often people click on ads, Google will show us how often people see ads. That’s a clever sleight of hand, all done in the name of simplification. I’m not buying it. What’s more likely is that Google is fighting with Facebook, Inc. (NASDAQ:FB) for ad dollars—meaning it has to spend more for traffic acquisition—and it doesn’t want you to know. (Source: “A few new accounting, reporting, and disclosure items in our Q1 earnings,” Alphabet Inc, last accessed April 23, 2018.)
What do these changes mean for the Google stock price today?
Well, I expect a positive bounce from Nest’s inclusion in the “core” group. Realistically, we’re just seeing two piles of revenue become one giant pile of revenue, but that has a strong psychological effect nonetheless.
I also believe that Google is a pretty good investor. A quick scroll through its portfolio reveals some big-name unicorns (Silicon Valley slang for startups with at least a $1.0-billion valuation) and dozens of other promising ventures.
But now let’s zoom out to 10,000 feet. Why is Google enacting these changes? Is there trouble in paradise? Should we expect a drop in Google’s earnings per share?
Google’s Big Transition
Until very recently, Google’s eggs were clustered in one basket: advertising. The company drew about 98% of its revenue from that source.
However, management realized that this dependence would sooner or later spiral into an addiction, so it set about diversifying Google’s business. The company is down to 85% concentration in ad revenues.
Driverless cars, artificial intelligence, robotics—Google dipped its toes into every major trend in order to keep GOOGL stock moving up and to the right. Even so, investors continue to worry that Google is overdependent on online advertising.
You can see that, plain as day, in the long-term arc of GOOGL stock prices.
Chart courtesy of StockCharts.com
You see, Google’s “traffic acquisition costs” (34%) are growing faster than sales (24%). Investors took that as a bad omen for profitability. Luckily, Google’s push into hardware matured last year, bringing in an unexpected $1.2 billion. (Source: “Alphabet Announces Fourth Quarter and Fiscal Year 2017 Results,” Alphabet Inc, February 1, 2018.)
It’s still early days for Google’s side hustles, but the burst of profitability might help soothe investors’ nerves. Plus, it might help to see that Google’s investments were working quietly in the background, accruing gains without us knowing.
In any case, I’m personally bullish on the company’s ability to diversify.
So, no, I don’t expect a drop in Google’s earnings per share. In fact, the addition of realized gains makes me think that the company will beat the consensus estimate of $9.35 in earnings per share on $30.36 billion in revenue. We’ll find out if I’m right today at 4:30 p.m. ET.