What Happened

Shares of Google's parent company fell about 4% in after-hours trading as earnings per share came in lighter than expected. Revenue, at $40.5 billion, was basically in line with expectations. Paid clicks, which is where Google makes most of its money, slowed considerably, with a year-over-year growth of only 18%, versus 62% the same time last year. However, the revenue it gets from each click, called “cost-per-click” only fell 2%, versus the 28% slide over the same period a year ago.

(Below is Investopedia's original earnings preview, published 10/23/19)

What to Look for

Alphabet Inc. (GOOGL, GOOG), the parent company of search engine Google, is the dominant player in internet search and advertising and is scheduled to report Q3 2019 results after the close on Oct. 28. Analysts are expecting Alphabet to report tepid earnings gains on robust revenue growth, according to consensus estimates.

Advertising remains by far the biggest source of revenue for Alphabet, contributing nearly 84% of the total in Q2 2019. As a result, investors will be keen to see progress in key metrics related to advertising, particularly the year-over-year change in paid clicks by users, which has been on an uptrend.

Alphabet

For the year 2019 through Oct. 22, Alphabet class A shares (GOOGL) are up by 18.8%, while the class C shares (GOOG) have gained 20.0%. By comparison, the S&P 500 Index has advanced by 19.5%. Alphabet has been among the big tech stocks weighed down by increasing political and regulatory scrutiny, including indications that it may be the subject of an antitrust probe, according to the U.S. Department of Justice (DOJ).

A recent report from Bank of America Merrill Lynch sees some risk to Q3 EPS from various fines and settlements. These include a French tax settlement, new French digital taxes, and fines on YouTube.

A big concern for investors has been whether Alphabet can maintain the revenue growth it enjoyed for much of the past decade. Its total quarterly revenue peaked at $39.276 billion in Q4 2018, before sliding to $36.339 billion in Q1 2019 and recovering partially to $38.944 billion in Q2 2019. The Q2 figure beat the estimate by 1.91%. The estimate for Q3 2019 represents a 19% increase in revenue.

Alphabet's quarterly earnings figures, as measured by EPS, have been more volatile than revenues. Nonetheless, the company has been consistently profitable from 2003 onwards, posting only one quarterly loss in that time frame. The Q2 2019 actual EPS figure beat the estimate by nearly 24%, and the Q3 estimate anticipates EPS growth of only 2.78%.

Alphabet Key Metrics
  Q3 2019 (Estimate) Q3 2018 Q3 2017
Earnings Per Share (in dollars) 13.42 13.06 9.57
Revenue (in billions of dollars) 40.15 33.74 27.77
YoY change in paid clicks N/A 62% 47%
Sources: YCharts, Alphabet Investor Relations

Along with the change in paid clicks, investors will be watching a related metric, cost-per-click. In online advertising, the cost-per-click is what the advertiser pays when a reader clicks on a company's search ad. From the perspective of websites and search engines such as Google that sell ad space, what they report as cost-per-click actually represents revenue that they are receiving from advertisers.

Analysts provide no reliable estimates for paid clicks or cost-per-click for Q3 of this year. However, Alphabet's average cost-per-click fell by 28% in the same quarter a year ago, Q3 2018. Cost-per-click also fell 18% in Q3 2017. So, while paid clicks were increasing for Alphabet, the average revenue that advertisers have been paying them per click has been decreasing. However, the rise in paid clicks has more than offset the impact of declining cost-per-click, putting advertising revenue on an uptrend.

Paid clicks alone may no longer be enough to boost Alphabet's growth longterm. As a result, the company also has been bolstering its EPS through an aggressive share repurchase plan that is shrinking its shares outstanding. In July, the company announced that it had authorized additional spending of $25 billion on share repurchases. This figure is equal to about 2.9% of Alphabet's current market capitalization.