Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reported quarterly earnings last week, and even though earnings per share and revenue beat estimates, the stock dropped significantly on weak performance in some other key metrics.
In this Industry Focus: Tech segment, host Dylan Lewis is joined by two summer interns to go over the most important numbers from the call, which metrics are trending in the wrong direction, and how worried investors should be about it.
A full transcript follows the video.
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This video was recorded on July 28, 2017.
Dylan Lewis: Why don't we start out talking about what we saw from Alphabet this quarter? This is Google's parent, one of the first big tech names to release earnings this quarter. Looking at the results, the company posted $26 billion in revenue, up over 20% and beating expectations by a few hundred million. EPS was a little fuzzier for the company. They had some one-time items that caused some issues with that metric. Excluding those, EPS came in at $8.90 per share, beating estimates. Of course, the company had to recognize that one-time item, the $2.7 billion charge after being fined by the European Commission for some antitrust practices which brought actual EPS down to $5, also beating expectations. All that said -- all those great top-line and bottom-line numbers -- shares actually took a 3% dip. What were some of the issues that the market was seeing in these results, guys?
Connor Lott: I think there's a couple metrics that analysts were looking for to continually improve over the next couple quarters, and they were soft, a little bit. CPC, cost per click, which is an important metric that reflects how much Google gets for ads, was down 23% year over year, and 6% quarter over quarter. That wasn't measuring up to what was expected. Additionally, traffic acquisition cost, or TAC, amounted to $5.09 billion, which was higher than analyst projections of $4.75 billion, which is up to 22% of advertising revenue from 21% a year ago. Basically, CPC, which should be up, went down; and TAC, which should be down, went up. So, it's not entirely worrisome right now for Alphabet, but analysts are looking a little bit down the road and saying this could impact the enormous revenues that are coming in from Google.
Lewis: The CPC story is one that's been playing out for a while. As the company, and really the world, transitions to mobile browsing rather than desktop browsing, we've seen CPCs come down. I think analysts were expecting it to be somewhere in the teens as it dropped, and instead it came in at that 20% figure. So, I think that's why you see some of that reaction. The flip side of that, and why the company has been able to continue to grow that top line, is because more people are connected; it's easier to just have a phone or something like that, and be on the internet. The company has been able to make it up on volume for quite some time.
Aneesh Susarla: I think you really characterized that perfectly. When more people are continuing to use mobile devices for browsing, Google is really going to have to figure out how it can continue to drive revenue growth and ensure that advertisers are best characterized with mobile revenue.
Lewis: Yeah. So, I think some of those concerns are warranted. I am a believer that they will figure that out, as the ad giant, and probably one of the two biggest sources of digital ad spend. I'm not too concerned about it, but definitely something to be mindful of. The reason that it's such a concern is, looking at how Alphabet makes its money, $25.8 billion in revenue of that $26 billion figure [is] coming from Google and the internet properties. So, it's understandable that people are a little worried about that CPC trend.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aneesh Susarla has no position in any stocks mentioned. Dylan Lewis owns shares of Alphabet (A shares). TMFcurrahee 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.