Will Paid Clicks Help Alphabet Beat On Q3 Earnings?

Alphabet Inc. GOOGL will report third-quarter 2017 earnings on Oct 26 after the closing bell.

The surprise history has been decent in Alphabet's case. The company missed estimates only once in the last four quarters and has an average four-quarter positive surprise of 5.06%.

We expect the company to perform well driven by strength in paid clicks, strong advertising revenues, mobile search ads and increasing momentum in Other Bets segment. Also, increasing use of machine learning features in Google Maps, YouTube, Gmail and Google Photos will drive top-line growth.

Coming to the price performance, on a year-to-date basis, the company's shares have rallied 24.4% compared with the industry's gain of 27.5%.

Paid Clicks

In the second quarter, paid clicks grew 12% sequentially and 52% year over year.  Google sites paid clicks grew 15% and 61%, respectively, from the previous and year-ago quarters. However, Network paid clicks decreased 5% sequentially but increased 9% from the year-ago quarter. It is expected to grow in the to-be-reported quarter, driven partly by growing volumes of mobile and TrueView ads on YouTube.

Strong Advertising Revenues

In the second quarter, advertising revenues grew 5.9% sequentially and 18.4% year over year to $22.7 billion.  It is expected to grow in the to-be-reported quarter, driven by healthy growth in its mobile search ads, YouTube ads and programmatic advertising. The Zacks Consensus Estimate for advertising revenues is currently pegged at $23.4 billion.

In the last reported quarter, mobile search continued to benefit from improvements in ad formats. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals as a result of studying mobile searches from its huge database. As a result, revenues from mobile platform are expected to increase in the to-be-reported quarter.

Other Bets Segment Gaining Momentum

Alphabet broke up the segment in the March quarter of 2016. The segment includes Fiber, Verily, Calico, Nest and incubation activities in X Labs. Since this segment is a combination of a number of businesses that are in the pre-revenue stage, operating different models and serving diverse end markets, the results are likely to be soft in any given quarter. However, this segment is gaining momentum and has performed well in the second quarter. The Zacks Consensus Estimate for Other Bets segment for the upcoming quarter is pegged at $267 billion.

Other Factors

The increasing use of machine learning features in Google Maps, YouTube, Gmail and Google Photos will continue to drive top-line growth in the upcoming quarter.

YouTube remains a strong contributor, benefiting from the increase in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day.

Also, Google's cloud business trails Amazon's AWS, Microsoft's Azure and IBM. The company's cloud business is expected to do well in the to-be reported quarter. And finally, Google platforms like Android, Chrome and Daydream continue to help it draw more users and sell more ads.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Alphabet has a Zacks Rank #3 and an Earnings ESP of +1.77% and that indicates a likely positive surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Alphabet Inc. Price and EPS Surprise

Alphabet Inc. Price and EPS Surprise | Alphabet Inc. Quote

Stocks to Consider

You could also consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

Applied Materials, Inc. AMAT, with an Earnings ESP of +0.37% and Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Texas Instruments Incorporated TXN, with an Earnings ESP of +0.07% and Zacks Rank #2.

Extreme Networks, Inc., EXTR with an Earnings ESP of +9.75% and a Zacks Rank #3.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Extreme Networks, Inc. EXTR: Free Stock Analysis Report
 
Alphabet Inc. GOOGL: Free Stock Analysis Report
 
Texas Instruments Incorporated TXN: Free Stock Analysis Report
 
Applied Materials, Inc. AMAT: Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research