What Happened

Mixed news from Alphabet as it reported a revenue miss and a sizable beat on earnings. Alphabet's stock dropped in after-market trading by about 1.4%, which indicates that investors may be more disappointed with the revenue miss than happy about the earnings beat. Alphabet also significantly changed how it reported its financials. For the first time, it reported Google Cloud and Youtube revenue separately from overall Google revenue. Also notable was what it didn't include. Alphabet's press release made no mention of its YOY growth in paid clicks.

(Investopedia's original earnings preview is below, published 1/24/20)

What to Look for

Shares of Alphabet Inc. (GOOGL), the parent company of search engine Google, have gained steam in 2020, boosting the tech company's market value beyond the $1-trillion mark. Investors will be looking closely at whether Alphabet can maintain that momentum when it reports earnings on February 3, 2020 for Q4 2019. Analysts, however, are expecting mixed results for Q4. They estimate that earnings will decline slightly from the same quarter a year ago as revenue rises. One key metric that may be of particular concern to investors is the year-over-year (YOY) growth in paid clicks on ads, which analysts expect to show a sharp slowdown compared to the year-ago quarter. Aided by their recent spurt, Alphabet shares have provided investors with a total return of 37% over the past 12 months compared to the S&P 500's total return of just over 25%.

One Year Total Return for S&P 500 and Alphabet
Source: TradingView.

Alphabet's results thus far in 2019 also have been mixed. The company posted YOY revenue growth of 20.0% for Q3 2019, which is slightly higher than the growth posted in Q2 but still below the company's historical trend. However, the cost of revenue grew at an even faster rate of 23.0% YOY, contributing to a 22.5% decline in earnings per share (EPS), which badly missed analyst expectations.  Alphabet shares fell 2.2% the day after its earnings release.

During Q2, revenue grew at 19.3% compared to the year-ago period. Earnings were a highlight, beating analyst forecasts by a wide margin and rising 212.8% YOY.  The day after the earnings release, Alphabet shares spiked 9.6% before losing most of that gain over the following week and a half. Still, Q2 was a definite improvement compared to the Q1 earnings report in which earnings missed expectations and the stock plummeted as much as 7.5% the next day. 

Alphabet Key Metrics
  Estimate for Q4 2019 (FY) Actual for Q4 2018 (FY) Actual for Q4 2017 (FY)
Earnings Per Share ($) 12.49 12.77 (4.35)
Revenue ($B) 46.9 39.3 32.3
YOY Growth in Paid Clicks (%) 39.6 67.7 46.8

Source: Visible Alpha

Aside from earnings and revenue, investors will be focusing on growth in paid clicks, as well as a related metric, cost-per-click. Paid clicks represent clicks on advertisements by users of the Google search engine and other platforms owned by Alphabet, including Gmail, Google Maps, and Google Play. The metric also includes views of advertisements on YouTube. Cost-per-click represents the average amount Alphabet charges advertisers for each paid click by users, and is calculated by dividing click-driven revenues by the total number of paid clicks.

Analysts are expecting Alphabet to report growth in Q4 paid-clicks of 39.6%, which would be faster than the 27.8% YOY growth in Q3. But, overall, Alphabet's growth in paid clicks has seen a noticeable downshift in recent years. For example, the Q4 growth is dramatically slower than every quarter in 2017 and 2018 and also slightly less than Q1 of 2019.

The picture doesn't look much better when looking at cost-per-click. It's expected to come in 3.0% lower than Q4 2018, and at $0.37 per click would represent the lowest average quarterly amount charged by Alphabet for all of 2019. Cost-per-click has been showing a steady downward trend for at least the past three years, which means each click is generating less revenue from advertisers than it once did. In fact, cost per click has fallen in each of the past 11 quarters from Q1 2017 to Q3 2019. Only the continued growth in paid clicks has kept Alphabet's total click-driven ad revenue on an upward trend.