Alphabet 3Q Earnings Will Focus On Advertising, The Cloud And US Antitrust Lawsuit

With all the “sturm und drang” surrounding Google and the antitrust lawsuit the U.S. Justice Department brought earlier this month, it’s easy to overlook the fact that parent company Alphabet is reporting third-quarter earnings on Thursday (Oct. 29). Alphabet’s earnings report will offer a look into the company’s search, cloud and advertising businesses, and how the ongoing pandemic is shaping them.

Here’s what to expect:

Q3 Expectations: A Better Quarter Than Q2

Analyst consensus, as reported by Yahoo! Finance, looks for earnings of $11.30 a share, up more than 11 percent from a year ago. Analysts also expect revenues to add 6.8 percent growth to $35.3 billion.

Growth on the top line would mark a reversal from what Alphabet reported for the second quarter, when the company logged a revenue decline of a bit more than 2 percent year on year to $38.3 billion.

All eyes this time around will be on Alphabet’s advertising revenues, which were down to $29.9 billion in the latest period versus $32.5 billion in the same period last year. That’s the first time ad revenues declined year over year in the firm’s history.

However, management has said that search activity has been returning to encompass more “commercial activity” and with more spending by advertisers, according to CFO Ruth Porat.

As the U.S. unemployment rate improved a bit heading into the fall and business reopenings continued, it might be that some of Alphabet’s commercial business picked up in Q3 and could continue to do so this month as well.

Drilling down into the numbers elsewhere, there were other pockets of strength in Q2 that look set to continue and perhaps even accelerate their growth.

For instance, Alphabet’s Q2 YouTube revenues surged 5.8 percent to $3.8 billion amid the great digital shift that has become a hallmark of life lived indoors. And Alphabet’s “Other” revenues segment – driven in part by Google Play – rose 26 percent in Q2 to $5.1 billion. However, Google Play and the company’s app store ecosystem will likely get some scrutiny, especially surrounding commissions.

It will also be important to take stock of Alphabet’s cloud segment, where revenues rose 42 percent in Q2 to $3 billion. We wonder if SAP’s mixed report this week – and its commentary that commercial embrace of the cloud is seeing headwinds among the economic and pandemic – will hit this segment for Alphabet, too.

Meanwhile, the “Other Bets” segment, which includes some more advanced tech like life sciences and the Waymo self-driving car business, saw revenue fall 8.6 percent in Q2 to $148 million. 

Recent News: Justice Department Lawsuit

We’re likely to get at least some general commentary (perhaps scripted) on the antitrust suit and how Alphabet views the matter.

Blog posts from the company have argued that people use Google because they choose to, not because they have to – countering regulators’ claims that the firm is a monopoly. Of course, there is any number of ways the legal battle might play out, likely over a period of years.

Thursday’s earnings call with analysts isn’t likely to tip Google’s hand as to how it might battle an attempt to, say, break up the company or dismantle agreements. But expect analysts to try to tease at least some insight out of management. 

Overall, expect Alphabet’s 3Q earnings to have puts and takes, with some insight into what’s happening amid the explosion in eCommerce, work-from-home setups and what lies ahead.