Google (Alphabet) Q1 2021 Earnings Preview: What to Look For

Alphabet Inc.'s (GOOGL) Google is facing seemingly endless antitrust scrutiny. This time the target is Google's alleged power over its smartphone ecosystem, more specifically the Android mobile technology developed by Google that's used by millions of consumers globally. Google came under attack from critics at a recent U.S. Senate hearing, which could lead to antitrust action by regulators. The company has already been sued by federal and state authorities for alleged antirust violations related to its search and advertising businesses.

As Google attempts to deflect the allegations, investors will be watching to see if the company can continue its strong financial performance when it reports earnings on April 27, 2021 for Q1 FY 2021. Analysts expect adjusted earnings per share (EPS) to rise at a healthy pace and revenue to rise at its fastest pace in 11 quarters.

Investors will also be focusing on revenue growth for Google Cloud, one of Google's main business segments. Google Cloud offers tools for developers through a cloud platform as well as other workplace collaboration tools. Analysts expect Google Cloud revenue to continue growing at a robust pace.

Shares of Alphabet have outperformed the broader market over the past year. But the performance gap began to widen in mid-January and then ballooned following the company's Q4 earnings report issued in early February. Alphabet's shares have provided a total return of 80.9% over the past year, well above the S&P 500's total return of 49.4%.

Google (Alphabet) Earnings History

The stock jumped following the company's Q4 FY 2020 earnings report. Adjusted EPS rose 41.0%, the fastest increase since the year-ago quarter. Revenue for the quarter grew 23.5%, marking the fastest pace of growth since Q2 FY 2018. Google said that revenue was driven by its Search business and YouTube.

In Q3 FY 2020, adjusted EPS grew 26.1% compared to the year-ago quarter, a significant improvement from the YOY declines posted in the first two quarters of the year. Quarterly revenue rose 14.0% YOY, a big turnaround from the 1.7% decline posted in the prior quarter. Google noted that Q3 results reflected an increase in ad spend in the Search and YouTube businesses as well as ongoing strength in its cloud business and the Google Play app store.

Analysts expect the strong performance to continue in Q1 FY 2021. Adjusted EPS is expected to rise 36.2%. Revenue is forecast to climb 25.3%, which would be the fastest pace in 11 quarters. For full-year FY 2021, analysts are currently estimating adjusted EPS to rise 11.6%, a slowdown from last year's 50.3% pace of growth. However, revenue is expected to rise 24.2%, which would be the fastest pace in at least five years.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also be focused on Google Cloud revenue. Google Cloud is one of Google's primary business segments, the other being Google Services. The cloud segment provides developers with a highly scalable and reliable platform for building, testing, and deploying applications. It also offers workspace collaboration tools, including apps like Gmail, Docs, Drive, Calendar, Meet, and more. Revenue is generated through the collection of fees related to these services. At the end of 2020, Google Cloud had an estimated 9% of the global cloud market, ranking it third behind Microsoft Corp.'s (MSFT) Azure and top-ranked Amazon.com Inc.'s (AMZN) Amazon Web Services.

Google Cloud revenue has grown at a robust pace of 43.9%, 52.8%, and 46.4%, in fiscal years 2018, 2019, and 2020, respectively. Analysts expect a similar pace of growth in Q1 FY 2021, though they are currently estimating a slight deceleration for all of FY 2021. Google Cloud revenue is seen rising 45.2% in the first quarter, relatively consistent with growth rates posted in the past several quarters. But it's expected to rise 42.6% for all of FY 2021, the slowest pace in the last four years.