Alphabet, the parent company of Google, reports Q2 earnings after the close on Monday, July 24th.

Alphabet Inc (NASDAQ: GOOGL)

52-week range: 743.59 - 1,008.61 (as of close Jul 20, 2017)

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EPS

Consensus earnings per share (EPS) forecast is $8.2, from $7.73 in the preceding quarter. Getting an apples-for-apples comparison with the prior year is harder because Alphabet has changed the way it reports some numbers, but analysts seem convinced EPS will continue to tick higher.

Revenue growth

When you’re talking about a $1,000 stock, revenue in absolute terms is only part of the story – investors are also looking for revenue growth rates to continue to accelerate to justify valuations that mean GOOGL is trading at price-to-earnings ratio of about 33. At 22%, year-over-year Q1 revenue growth was ahead of the prior year period (17%) and steady from the preceding quarter which was also 22%, or 24% on a constant currency basis. 

Ad revenues

Advertising is the key cash driver so the number for Google advertising revenues is important. In Q1 this jumped to $21.4bn from $18bn a year before. Alphabet generates most of its income from its core search engine and YouTube.

Clicks

There are two key metrics to watch here as advertising is the golden goose in terms of revenues and profits.

First aggregate cost per click, which is how much Google charges for its ads. This fell 19% in Q1 from the prior year period. Continued declines in the cost per click is a concern but a lot less so as revenues continue to climb in absolute terms.

The other metric is aggregate paid clicks — the number of times people click those ads. In Q1 this jumped 44%.

In other words, pricing and margins are under pressure but volumes are great. This trend ought to continue in Q2.

It is worth remembering that Alphabet has refined the methodology for paid clicks and cost-per-click, which it says resulted in “a modest increase in paid clicks and a modest decrease in cost-per-click”.

Other revenue

Alphabet is playing catch-up with Amazon Web Services and it’s the cloud business that is one of the most prominent in the ‘Other Revenue’ category. This is worth about 10% of group revenues and includes hardware sales, Google Play revenues and the cloud business.

Other Bets

Whether it’s the self-driving car company Waymo and medical research business Verily, Alphabet is burning a lot of cash on its ‘Other Bets’ category. Last quarter this lost $855m against $744m in the same period the year before, although revenues climbed. It looks small enough but the bigger the loss in this area the more it drags on overall EPS.

Tendency to beat estimates

According to Zacks and Nasdaq data, Alphabet has exceeded estimates by an average of more than 5% over the last four quarters. The company missed estimates in one of those four quarters.

Last quarter was a beat. EPS hit $7.73 vs. $7.39 expected, on revenues of $24.75 billion against $24.22 billion expected.

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