The fourth quarter is a seasonally big one for both Alphabet/Google (GOOGL) and Amazon.com (AMZN) . And with both companies having delivered stellar third-quarter reports and going into their latest reports trading near highs, expectations are certainly elevated.
On average, analysts polled by FactSet expect Alphabet to post revenue of $25.57 billion (up 21% annually) and GAAP EPS of $10.02 (up 33%). Amazon, which of course continues to reinvest nearly every additional dollar of gross profit it gets back into its business, is expected to post revenue of $59.75 billion (up 37%, lifted a bit by Whole Foods) and GAAP EPS of $1.88 (up 22%).
Amazon, unlike Google, also provides quarterly sales and operating income guidance. Its Q1 revenue consensus stands at $48.6 billion (up 36%), and its op. income consensus at $1.5 billion.
Here are some things to keep an eye on as Google and Amazon report after the close on Thursday:
1. Google's paid click growth
Google's paid clicks, defined as revenue-producing ad clicks and views, rose 47% annually in Q3, with 55% growth registered on Google's sites and apps. Mobile search -- boosted by Google Shopping ads and larger text ads -- and YouTube have been the main growth drivers.
Thanks to those growth drivers, as well as Google's continued ad targeting improvements and the popularity of Google Shopping ads among online retailers during the holiday season, strong paid click growth is also expected in Q4. Analysts on average forecast 42% growth, more than offsetting an expected 14% drop (also caused by mobile search and YouTube) in Google's average ad price (cost per click).
2. Amazon's international sales
After rising 22% annually on a constant currency (CC) basis in Q2, Amazon's international growth accelerated in Q3, rising to 28% in CC and 29% in dollars. Strong European and Indian momentum, aided by Amazon Prime's popularity and growing international product selection, played a big role.
The Q4 consensus is for international revenue, expected once more to get a forex boost, to rise 28% to $17.9 billion. Jeff Bezos' firm doesn't break out its international sales by country in its earnings reports (though it did share numbers for the U.K., Germany and Japan in last year's annual report), but could provide some commentary on its earnings call about international growth drivers.
3. Amazon's U.S. e-commerce share gains
Amazon's North American e-commerce reporting segment saw revenue surge to $25.4 billion in Q3. That officially represents 35% growth, and amounts to 28% growth after backing out the impact of the Whole Foods acquisition, which closed in August. Either way, it was much better than the estimated 15% growth seen by the total U.S. e-commerce market.
With Whole Foods on the books for a full quarter, the Q4 consensus is for North American segment revenue to rise 38% to $36.2 billion. Data from third-party research firms on Amazon's U.S. holiday season activity has been pretty favorable.
4. The "Google Other" reporting segment
This segment covers sales of Google-branded hardware, Google Play transaction cuts, cloud app and service revenue, YouTube's subscription services and any other non-advertising Google revenue stream. Its revenue rose 40% in Q3 to $4.3 billion; the consensus for Q4 is for revenue to rise 35% to $4.6 billion.
It wouldn't be shocking to see Google meaningfully top that consensus. Though not a blockbuster, it looks like the Pixel 2 XL (launched in October) had a solid debut, and Google also sold quite a few Home Mini speakers during the quarter. And revenue for both Google Play and the Google Cloud Platform (GCP) have been growing at healthy clips.
5. AWS growth and margins
Though GCP and Microsoft's (MSFT) Azure have been registering strong growth, AWS remains the public cloud services market's 800-pound gorilla. Its revenue rose 42% in Q3 to $4.6 billion, with operating income rising 36% to $1.17 billion.
The Q4 consensus is for AWS revenue to rise 41% to roughly $5 billion. Operating income, pressured some by heavy capital spending, is expected to be up 15% to $1.27 billion. At its late-November AWS re:Invent conference, Amazon unveiled a plethora of new AWS services, as well as some new high-profile customer wins. The announcements likely arrived too late to provide a large boost to Q4 revenue, but could have a larger impact starting in early 2018.
6. Amazon and Google's spending activity
With Wall Street providing a green light, Amazon returned to its heavy-spending ways last year. Its fulfillment, marketing and tech/content expenses have all been growing rapidly in recent quarters, and so has its capital spending on both warehouses and data centers. More of the same is expected in Q4, which is why (in spite of strong revenue growth) its free cash flow (FCF) is expected to drop by nearly $1.3 billion annually in seasonally strong Q4 to $7.4 billion.
Google has been more restrained with its operating expense/hiring growth, but has begun dialing up its capex again. The company's capital spending rose 39% in Q3 to $3.5 billion, and there's a good chance it grew sharply again in Q4. That's one reason its FCF is forecast to drop slightly in Q4 to $5.9 billion.
7. Amazon Prime's momentum
Amazon doesn't break out its Prime subscription revenue per se, but it did start sharing its total subscription services revenue, which is dominated by Prime, last year. This revenue stream rose 59% annually in constant currency in Q3 to $2.4 billion, and is expected to come in at $3.1 billion for Q4.
Strong holiday season Prime sign-ups likely provided a boost; Amazon has said that it got over 4 million sign-ups for new Prime free trials and memberships in one week alone. Following the end of Q4, Amazon hiked Prime's monthly subscription fee by $2 to $12.99, albeit while leaving its annual fee at $99 for now.
8. Google's "Other Bets" losses
Though Google has talked about being more disciplined with its investments in the Other Bets segments, which covers Waymo, Google Fiber, Nest and a slew of other businesses, the segment continues bleeding red ink. In Q3, it had an operating loss of $812 million (improved just slightly from Q3 2016's $861 million) on $302 million in revenue (up 53%).
The Q4 consensus is for an Other Bets op. loss of $940 million on revenue of $355 million. Larger investments in Waymo -- it just struck a deal to add thousands of Fiat Chrysler (FCAU) minivans to its ride-sharing fleet -- could weigh on the segment's bottom line in the near-term.
Jim Cramer and the AAP team hold positions in Alphabet and Microsoft for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GOOGL or MSFT? Learn more now.
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