Investors will soon learn more about what the coronavirus pandemic means for Google -- and potentially for the broader digital ad industry, as well.
The search and ad giant reports its latest earnings on April 28 after market close, and all eyes will turn to Google’s ad revenues as investors parse out the impact of coronavirus on the Internet sector. Google is the world’s largest digital advertising platform, and ad sales accounted for about 83% of Alphabet’s overall revenues in 2019.
Shares of Alphabet closed 1% higher on Thursday to $1,271.17.
For the March quarter, Analysts polled by FactSet are expecting earnings of $10.71 a share on $40.1 billion in revenue. Here are a few themes to watch.
1. Ad Demand
It’s no secret by now that coronavirus has weakened the ad sector, with scores of businesses closed, travel at a virtual standstill and consumers buying fewer goods outside of certain essentials. When Google shows its latest numbers, investors will get a better sense of how deep the impact to ad demand was last quarter -- and how soon it might recover.
“Industry checks suggest double-digit month/month declines in ad pricing between February and March. While lower prices and some ad budget shift from offline to online should help volumes, we do not believe that will be enough to offset broadly reduced economic activity as well as virtual shutdowns in industries such as travel & hospitality,” wrote Jeffries analyst Brent Thill in a recent note, noting that Google’s exposure to travel and SMBs mean revenues could remain depressed into Q2. Alphabet doesn’t typically give granular commentary on its ad results -- and also doesn’t issue quarterly guidance -- but these are nothing if not unusual times, and management may pull back the curtain more than usual on what’s happening with their business.
2. Non-Search Revenues
Sinking ad demand may be the most important variable in Alphabet’s upcoming earnings, but it won’t be the whole story. Investors have become increasingly interested in initiatives outside of Alphabet’s core business of search advertising, such as YouTube and Google Cloud. In February, Alphabet revealed for the first time that its cloud segment brought in $8.92 billion in 2019, while YouTube advertising brought in $15.15 billion.
Those are small potatoes compared to Alphabet’s total annual revenue of $162 billion, but overperformance in those segments will give investors confidence that the search juggernaut can diversify beyond its oldest and largest business. In a recent note, Credit Suisse analyst Stephen Ju lowered its price target to $1500 from $1700 but maintained an Outperform rating on shares based on strength in YouTube, Cloud, and Play, in addition to AI and product-driven improvements to Google Search.
Cutting expenses is one way to mitigate any damage from the pandemic, and Google appears to be doing just that.
According to internal memos, the company is taking a number of belt-tightening measures this year to offset any losses, including a hiring freeze in some divisions, slashing marketing budgets, and “recalibrating the focus and pace of our investments in areas like data centers and machines,” according to CEO Sundar Pichai. Alphabet ended 2019 with about 119,000 employees, and had been planning to hire about 20,000 new employees in 2020 as part of its investment "in priority areas, plus the decision to move certain vendor functions in-house," Google CFO Ruth Porat said in February.
Pulling back on expenses may or may not be enough to offset advertising revenue losses. But when Alphabet reports its March quarter results, investors will have an opportunity to hear directly from management on what the company is doing to navigate the fallout from the pandemic -- whether they be cost-cutting, re-investing in its core ad business, or otherwise.