If you’re merely looking at the numbers, you have to feel good about Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). With a few days before its first quarter of 2019 earnings disclosure, GOOGL stock is up 22% year-to-date. At the same time, earnings season can pull some cruel surprises.
On paper, the vaunted tech firm should deliver the goods. Consensus estimates target earnings-per-share of $10.49. This is very much near the higher end of the forecast spectrum, which ranges from $7.99 to $11.80. In the year-ago quarter, GOOGL brought home an EPS of $13.33.
On the revenue front, covering analysts expect the company to ring up $37.1 billion. Again, Wall Street is optimistic toward Alphabet stock, with sales estimates ranging from $30.6 billion to $37.9 billion. In Q1 2018, the internet stalwart delivered $31.1 billion.
However, GOOGL stock isn’t without its headwinds. Google has run afoul of European regulators, and back home, politicians are supporting a tougher stance on digital violations. Ahead of the pivotal Q1 report, investors should consider these three factors:
Will the E.U. Fine Hurt GOOGL Stock?
Last month, the European Union hit the internet search giant with a 1.5 billion euro fine, or approximately $1.7 billion. The reason? As usual, the E.U. frowned upon what they considered Alphabet’s anticompetitive practices.
Discussing the granularity would take up its own full-sized article or five. But to summarize, the E.U. accused GOOGL of forcing third-party websites who use the company’s search bar to disproportionately display Google-linked advertisements. Effectively, this move shut out competitors within digital-advertising space, including Microsoft (NASDAQ:MSFT) and Yahoo.
So far, the fine and associated controversy hasn’t impacted Alphabet stock. As previously mentioned, shares are up 22% YTD. And while the tech firm did suffer some blows in the markets following the news, GOOGL still gained more than 2% in March.
However, the issue isn’t one to take lightly. In recent months, the shady dealings involving tech firms have alarmed American politicians. Popular presidential candidates have called for greater oversight in Silicon Valley, especially in light of Facebook’s (NASDAQ:FB) many scandals.
In addition, the E.U. fine — along with potentially stricter policies in the U.S. — opens the door to competition. Obviously, advertisements represent the lion’s share of Alphabet’s revenues. If that dynamic absorbs a substantive hit, investors may shed GOOGL stock for protective reasons.
Non-Advertising Businesses Under the Spotlight
A key factor influencing GOOGL stock is the underlying company’s “Other Revenues” segment. Essentially, this includes the bulk of Alphabet’s non-advertising businesses. We’re talking about their app suite, cloud platform and hardware.
Like other dominant tech firms, Google’s management team has prioritized revenue diversification. Clearly, its efforts have paid off. Over the last several years, Other Revenues, as well as Other Bets, skyrocketed exponentially. Past earnings reports reaffirmed this trend, boosting Alphabet stock.
So, we’re all good for Q1, right? Well, not so fast. While other segments within the Alphabet umbrella has grown, so too has the company’s core advertising businesses. In fact, the situation is getting “worse,” if you will.
For instance, back in 2013, Google’s Websites division represented 67.4% of total revenues. Last year, that metric bumped up to 70.4%. With the slight exception of 2017, Websites increased its share of all Google sales.
That’s not necessarily a cause for concern. This uptrend merely confirms that the Google search engine and its ad ecosystem is vastly superior to the competition. As I’ve said before, Alphabet owns the internet.
But you can never get too comfortable in tech. Going back to our first point, harsh E.U. penalties and rising criticism back home may impact Alphabet’s moat. Therefore, investors will be more comfortable if Alphabet’s other segments pull more weight.
That’s not happening right now, and that’s a growing concern for GOOGL stock.
Other Bets Is a Longer-Term Dark Horse
Most likely, Wall Street will focus on the above two points, as well as other nearer-term issues. As such, the direction of the GOOGL stock price depends on a combination of facts and perception.
But on a longer-term outlook, I’m particularly interested in the company’s Other Bets segment. Other Bets is exactly what you think it is: It’s the experimental stuff that’s technically compelling but isn’t making money for Google. Driverless taxi service Waymo is a perfect example.
On the revenue side, it’s really a footnote or a rounding error. Last year, Other Bets rang up less than $600 million. But I’m excited about this division because it presents the company’s longer-term dark horse.
Sure, Alphabet will produce some whoppers from here, and I don’t mean that in a good way. We’re talking about letting the tech geeks have their way. But while the company focuses on its core business, something extraordinary could originate from here. That could possibly change the course of Alphabet stock over the next several years.
Bottom Line on Alphabet Stock
Overall, I think Google is well-positioned for another earnings beat. Despite harsh headwinds, I believe they unintentionally confirm the obvious — Alphabet is an unprecedented force in the digital space. Therefore, from a longer-term perspective, I’m bullish on GOOGL stock.
Where it gets tricky is the nearer-term picture. A very real risk exists that shareholders who have grown rich on Google’s consistent dominance will bail out. Lack of revenue diversification may be the catalyst. So don’t be surprised if you experience some turbulence next week.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
