What to Watch When Alphabet Releases Earnings

By Steve Symington Markets Fool.com

Google parent Alphabet Inc. (NASDAQ: GOOG)(NASDAQ: GOOGL) is set to release fourth-quarter 2016 results Thursday after the market closes. With Alphabet stock up 16% over the past year and trading at an all-time high as of this writing, the market will be listening closely to what the internet search behemoth says.

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So what should Alphabet investors be watching this time around?

"G" is for Google. Image source: Alphabet, Inc.

Alphabet's headline numbers

First, Alphabet isn't in the habit of providing specific quarterly financial guidance. So for perspective -- even though we don't usually pay close attention to Wall Street's short-term demands -- consensus estimates predict that Alphabet will see revenue climb 18.3% year over year, to $25.2 billion, and translate to 11.5% growth in earnings per share, to $9.67. It should also be kept in mind the latter may be bolstered by any stock buybacks made under Alphabet's massive $7 billion-plus share repurchase plan approved last quarter.

Digging deeper

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This will also mark Alphabet's fifth quarterly report since shifting to a segment-based reporting model early last year. Though the bulk of Alphabet's revenue and earnings are derived from its core internet search and advertising business, its "Other Bets" segment -- comprised of a handful of early stage, primarily pre-revenue businesses that operate across several disparate industries -- has grown by leaps and bounds, and now materially affects its results. As such, and as Alphabet continues to plow financial resources into these other bets, the company proactively sought this new reporting structure "to bring increased focus, accountability, and transparency" to shareholders.

As it stands, the majority of Other Bets revenue will likely come from a combination of Nest connected home products, Fiber high-speed internet, and Verily longevity solutions, with limited sales from the remaining bets like Calico life sciences products, self-driving cars, and Alphabet's "X" moonshot initiatives. We also shouldn't be surprised if Other Bets remains solidly unprofitable. The segment generated an operating loss of $865 million last quarter, though it's worth noting that was narrowed from an operating loss of $980 million in the same year-ago period. In short, Alphabet's focus here remains on fostering the long-term potential of these promising businesses.

On Big "G"

Of course, we can't forget Google, the money-making machine that enables Alphabet to invest in those other bets.

Last quarter, Google saw sales climb over 20% year over year, to $22.254 billion, representing around 99% of Alphabet's consolidated revenue. And the primary driver within that total was advertising sales, which climbed just over 18%, to $19.82 billion, or 88.3% of total revenue. Those numbers show that the relative health of Google's ad business is crucial to its ability to continue thriving.

Alphabet will provide a number of useful ad metrics, including growth in advertising revenue from Google's own websites (up 22.9%, to $16.09 billion last quarter), and that of Google Network Members' sites (up 1% last quarter, to $3.73 billion). Google's mobile ads will likely remain a powerful protagonist, as a growing number of consumers turn to its massively popular mobile-friendly products like Search, YouTube, and Maps.

We should also look for stats on the effectiveness and volume of Google's ads, including growth in aggregate paid clicks (up 33% year over year last quarter), which will be similarly broken down between Google's own sites (up 42% last quarter) and those of network members (up 1% last quarter). That said, there may be continued declines in Google's aggregate cost-per-click (down 11% last quarter), a key metric that helps measure how much Google makes from each ad.

To Google's credit, however, recent declines in aggregate cost-per-click have largely stemmed from rapid growth of YouTube TrueView ad impressions. Because TrueView ads usually reach consumers earlier in the purchase funnel, they tend to monetize at lower rates than traditional web-based advertisements. Given YouTube's immense volume advantages, this is one enviable "problem" Google doesn't mind working to improve over time.

Next, listen for updates on the performance of Google's non-advertising products, primarily Google Play, Cloud, and hardware devices like Chromecast. Last quarter, non-advertising sales within Google increased 38.8% year over year, to $2.43 billion, offering a solidly profitable source of incremental growth.

Looking ahead

Finally, I wouldn't hold my breath for specific guidance on the coming year. But more than anything, investors want to know that Alphabet's core business remains healthy, which in turn allows the company to continue expanding its reach and making its products indispensable to consumers around the world. If Alphabet can continue working toward that end, its shareholders should enjoy more all-time highs going forward.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.