Alphabet Earnings Preview: What Might Be Expected For Q4?

The tech-heavy week of earnings continues with Google-parent Alphabet Inc GOOG GOOGL scheduled to report fourth-quarter results after market close today, Feb. 1. Since the start of 2018, GOOGL has climbed from $1053.02 to $1182.22 at yesterday’s close. Heading into the report, the stock isn’t too far off of its all-time high of $1198 hit on Jan. 2.  

For Q4, GOOGL is expected to report adjusted earnings per share of $10.12, up from $9.36 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue, excluding traffic acquisition costs (TAC), is projected to increase 20.9% year-over-year to $25.65 billion.

Total TAC, the money GOOGL pays out to partners and affiliates for directing traffic towards its sites, has increased in recent quarters and grew from 21% of Google advertising revenues in Q2 to 23% in Q3, driven by higher TAC in faster-growing areas like mobile search and programmatic advertising, according to company reports.

While advertising has been a significant portion of GOOGL’s business, analysts have become increasingly focused on the company’s Google Other and Other Bets categories.

Google Other is made up of non-advertising businesses, including hardware, Google Cloud and app store Google Play. In Q3, GOOGL reported revenue of $3.4 billion in the Google Other bucket, an increase of 40% year-over-year. For Q4, Wall Street consensus projects revenue will increase by 35% year-over-year to $4.6 billion.

Other Bets is the company’s smallest segment that includes Waymo, Nest, Fiber, Verily, Calico and others. In Q3, GOOGL reported revenue of $302 million for Other Bets, up from $196 million in the prior-year quarter. Nest, Fiber and Verily were the primary sources of revenue, according to management.

So far, Other Bets has consistently operated at a loss and GOOGL reported an operating loss of $812 million in Q3. For Q4, Wall Street consensus is expecting revenue of $355 million and a larger operating loss of $940 million.   

GOOGL STOCK PERFORMANCE. >Since the start of 2017, Alphabet’s Class A stock GOOGL, which is charted above, is up 46.31%, outpacing the Nasdaq 100’s (NDX) 41.51% return and the S&P 500’s (SPX) 25.07% return over the same timeframe. The NDX is charted as the teal line and the SPX is charted as the pink line in the chart above. Chart source: thinkorswim^® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Alphabet Options Trading Activity

Options traders have priced in about a 4.5% potential stock move in either direction for GOOGL around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility is at the 93^rd percentile as of this morning.

In short-term trading at the Feb. 2 weekly expiration, calls have been active at the 1172.5 and the 1180 strike prices, while open interest is the highest at the 1200-strike call. Trading has been lighter on the put side and the 1175-strike saw the most activity during yesterday’s session.

There hasn’t been a whole lot going on at the Feb. 16 monthly expiration, but further out at the Mar. 16 monthly expiration, trading has been heavier at the 1190-strike call, as well as the 1190 and 1200-strike puts.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Tomorrow morning, oil supermajors Exxon Mobil Corporation XOM and Chevron Corporation CVX report quarterly results, alongside the release of January’s unemployment rate and non-farm payrolls. The University of Michigan’s final reading for January consumer sentiment also comes out.

There’s still a lot of companies left to report this earnings season, although the pace of reports will start to slow down over the next few weeks. Some of the larger companies scheduled next week are Bristol-Myers Squibb Co (NYSEBMY), Gilead Sciences, Inc. GILD, Walt Disney Co DIS, CVS Health Corp. CVS, Philip Morris International inc. PM and Nvidia Corporation (NASDAQ;NVDA). If you have time, check out today’s Market Update for a rundown on what else is happening.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.