Alphabet: The 'Alpha' And The Other 'Bets'

| About: Alphabet Inc. (GOOG)

Summary

GOOG will report after market on Monday. This is the first time investors will get a sense of core business and other moonshot projects.

My focus will be on YouTube, which is positioned to take on more TV ad dollar, and VR, which GOOG has been ramping up aggressively.

Remain bullish on the stock. Like the options with "other bets".

Alphabet (NASDAQ:GOOG) will report earnings on Monday after the close. This will be GOOG's first time to break out the core business that includes search, mobile and YouTube, and its moonshot segment that includes driverless cars, robotics, drones and VR, to name a few. The stock has been down only 2% since the beginning of the year and was the best performer before Facebook's (NASDAQ:FB) double percentage jump. If GOOG beats expectations and if the "Other bets" profitability is better than consensus estimates, then I believe the stock could go higher post earnings. Keep in mind that this is the first time investors will have a good sense of GOOG's core profitability so a beat on this segment will be a positive given that most investors are expecting a loss on the "Other bets".

Consensus expects EPS of $8.09 on revenue of $20.77b, +43.4% y/y. Although the company beat on revenue last quarter, I caution that the structural challenge in mobile given the disintermediation by apps and competition from FB and Amazon (NASDAQ:AMZN) could threaten its core search business. My biggest concern is whether the core search business may see a slowdown this year. When coupled with the higher spending on cloud and data centers to compete against AMZN, profitability may be under pressure. If AMZN's latest quarterly is any indication, the market may be underestimating the opex spending for these large internet companies (See - Amazon: Two Steps Forward And One Step Back).

Two areas will be worth focusing on heading into the quarter:

YouTube will likely to be a bigger part of GOOG's growth story in that the macro trend in cord-cutting and cord-shaving is supportive of the platform as viewership and engagement migrate to digital channels. This secular tailwind favors video distribution platforms that have a broad spectrum of content capable of attracting various audiences. In addition, the growing penetration of smartTVs globally with YouTube as a pre-installed channel app is also driving YouTube penetration higher, allowing GOOG to steal more ad dollars away from TV. More important, the FCC recently announced a proposal to overhaul the cable set-top market by allowing third-party set-tops to have access to content, TV listings and streaming shows. The verdict will be announced on Feb. 18 and I believe a passing is very likely given that the existence of cable set-tops is a legacy issue and does not reflect the evolution of technology in which contents are moving to an online model. If passed, this will cause widespread disruption to the conventional pay TV landscape and YouTube will be a key beneficiary of this with its core ad-based UGC model and the recently scaled-up subscription model (see - Google Scaling Up Online Video).

Besides YouTube, commentary on VR will be another focus area. Note that GOOG recently hired Jason Toff from Twitter as well as allocating its top engineers to the VR division. Additionally, the hiring spree for the VR division has been aggressive based on my observation with focus on hardware engineering, electrical hardware, engineering projects and a focus on high-performance, battery powered highly constrained consumer electronic products. This suggests that GOOG is not looking just to commoditize VR with its cardboard box as it did with Android with smartphone, but something bigger and more powerful that can directly compete against Oculus, Hololens and PlayStation VR (see - Google: Getting Serious About Virtual Reality)

Conclusion, bullish on GOOG ahead of the print. I like the overall story, particularly its moonshot projects with each potentially becoming a billion dollar revenue opportunity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.