Google Stock: Finally, YouTube Revenue Numbers May Be Revealed Today

Alphabet Inc (NASDAQ:GOOGL) may break out YouTube numbers today in its Q2 earnings release. This could have a big impact on Google stock.

Alphabet Inc (NASDAQ:GOOGL) which owns online search giant Google is scheduled to report its Q2 earnings today, the 24th of July, after markets close. While some expect earnings numbers to be strong, others expect the tech major to disappoint this time around, and expectations are somewhat mixed. A hefty fine imposed by EU regulators is expected to dent earnings quite a bit. If a correction ensues, and the possibility cannot be ruled out, investors who are looking to accumulate shares could consider buying in.

Most importantly, this earnings announcement could finally see Alphabet break out revenue from YouTube. If this does happen, we should be able to value YouTube more accurately, and naturally, this will have a bearing on Alphabet’s valuations. Q2 could be more crucial in this context, than as a measure of a miss or a beat. Yet, this quarter’s numbers will require more than attention than usual. So, let’s take a quick look at them, and understand what has changed before we move on to YouTube.

Analysts expect Alphabet to report revenue of $25.64 billion for the quarter, which translates to about 19.2% Year-on-Year (YoY) growth. While that’s a little slower than the 22% growth we saw last quarter, considering the company’s massive revenue base, it’s nothing to complain about.

As for Earnings Per Share, analysts expect Alphabet to rake in $8.25 a share, compared to last year’s $8.42, marking a YoY drop in earnings. Do note, though, that this number represents Alphabet’s non-GAAP EPS. Alphabet changed the way it reports earnings last quarter, choosing to focus on GAAP earnings instead of non-GAAP results, which primarily exclude the impact of stock based compensation and other one-off charges. The numbers you see on Monday in Alphabet’s report may differ significantly from these numbers for two reasons.

First, as we highlighted, Alphabet now presents only GAAP numbers in its earnings release. So, the numbers are bound to fall short in any case. Further, earnings could be further depressed by the heavy fine imposed on the company by EU regulators. The European Union’s anti-trust regulator fined Alphabet $2.74 billion, the largest penalty it has handed out in its history, nearly doubling its $1.43 billion fine on Intel.

Google, which was accused of promoting its own shopping service above others in its search results, is reportedly still considering an appeal against the ruling. However, reports suggest that the company will recognize this charge in the quarter ended June 2017. And since this charge is not tax-deductible, it will reduce Alphabet’s net profits by that much.

Not surprisingly, JPMorgan analyst Doug Anmuth has cut his earnings estimate, nearly halving it from $8.47 to $4.54 a share. However, he has maintained his price target of $1075 a share, which he justifies by saying:

“we remain positive on the stock longer-term & believe Google has a long runway w/mobile & YouTube, along with newer growth areas incl. Cloud & Hardware, and ultimately Waymo.”

Evidently, his estimate is way lower than those of most analysts. Yet, as Anmuth points out, there’s sufficient reason to repose faith in the long term narrative. While the YouTube incident is bound to blow over in the medium term, the overall growth on offer remains impressive in the context of Google’s huge revenue base.

Now, with Alphabet more focused on monetizing its ‘other bets’, and Google leveraging offline spends to boost digital advertising, there’s a fair bit of gas left in this tank. The stock is backed by strong fundamentals, with a free cash flow (FCF) margin of 28%, a Return On Invested Capital of 32% and a Return Of Equity of 15%. What’s more, the company’s healthy profit margins mean that these trends are likely to continue (provided there aren’t too many run-ins with anti-trust regulators). So, if the stock does correct on Monday, investors could consider buying the dip once the stock has stabilized.

Watch Out For YouTube Numbers.

Possibly the most keenly watched aspect of the earnings release, though, will be centered around YouTube. Quoting MarketWatch, “Alphabet will now move from that change to new revenue-recognition rules that could have more effects, including potentially forcing the company to finally break out its YouTube revenue.” The post also points out:

“In all of its prior earnings reports, Alphabet has combined YouTube’s results with Google search and other advertising. The new revenue-recognition rules—which take effect in January but are already being implemented by some early adopters like Microsoft  Corp MSFT, -0.58% —call on companies to report revenues the same way they are being reported to the chief decision maker at the company”

Starting from Jan 2018, companies will be required to report revenues as in the manner described above, implying that Google may have to report YouTube revenue. Now that Alphabet has made the shift to reporting GAAP earnings instead of non-GAAP figures, it won’t come as a surprise if it decides to join Microsoft as one of the early adopters of these rules as well.

Alphabet has beaten analyst estimates in 3 out of its latest 4 quarters, with an average beat of 2.83%, which makes its Q2 earnings that much more interesting. If you’re looking for great tech stocks, check out our top stock picks from the tech sector, which have beaten the NASDAQ by over 154%. If you’re looking for technical trading ideas, you must check out our daily trading ideas section.