Alphabet: Focusing On The Core

| About: Alphabet Inc. (GOOG)

Summary

Alphabet will report earnings after Thursday’s close with consensus expecting $7.96 in EPS and $16.57b in revenue.

Core vs. non-core separation helps investor expectation ahead of the print with focus on cost cutting in core and improving revenue/profitability in non-core.

State of Android ecosystem, YouTube, and VR could be potentially catalysts after the print.

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) will report earnings on Thursday after the close. Once again investors will focus on 1) the growth of its core business that includes search, mobile, and YouTube, and 2) improving profitability (or profitability trends) of its moonshot segment that includes driverless cars, robotics, drones, and VR, to name a few. The stock was down -1.17% in Q1 vs. the broader NASDAQ of -1.85% and significantly underperformed rival Facebook (NASDAQ:FB) that was up +10.89% over the same period. Consistent with the broader investor sentiment, I expect ongoing cost control along with better than expected mobile and YouTube to drive the core business segment. The Q4 disclosure on core vs. non-core certainly helped investor sentiments but near-term regulatory concern, the structural challenge in mobile search (i.e. disintermediation by the mobile apps), the uncertainties involving the moonshots (i.e. selling robotics?) and recent media story on Nest certainly did not help how investors can accurately assess Alphabet's long-term growth outlook. To be clear, I am bullish on Alphabet's long-term outlook given the penetration of its ecosystem, which I view to be superior and more sustainable than that of the iOS. If Alphabet's core segments beat expectations and if the "Other Bets" deliver another round of positive updates, then I believe the stock could go higher post-earnings.

Consensus expects EPS of $7.96 on revenue of $16.57b, +19.1% y/y. Recall that the company beat on revenue last quarter (See - Alphabet: Solid Across the Board), but it is equally important for investors to be mindful of the structural challenge in mobile given the disintermediation by apps and competition from FB, Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) could threaten its core search business. Investors are concerned about the deceleration of Alphabet's core business, which is why cost cutting is essential in maintaining profitability in the near-term. With the company gradually diversifying away from search and investing heavily in cloud, VR, broadband, drones and other bets with each of them could potentially be as big as Alphabet's core business, I think the company is pursuing the right strategy.

Three things to look for on Thursday: The state of Android ecosystem, YouTube, and VR.

Last quarter showed that the Android ecosystem is stronger than ever with Gmail surpassing 1 billion active users. Search, Android, YouTube, Maps, Chrome browser, and Google Play all saw positive momentum on user penetration and with an active user base comparable to that of FB. I see Alphabet having perhaps the most attractive portfolio of assets that can support its core business growth. Worth recalling that the competitive dynamic amongst the internet companies all boils down to ecosystem penetration and Alphabet certainly executed on this front.

YouTube will likely to be a bigger part of Alphabet'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 smart TVs globally with YouTube as a pre-installed channel app is also driving YouTube penetration higher, allowing Alphabet to steal more ad dollars away from TV. FCC's recent overhaul on the cable set-top market by allowing third-party set-tops to have access to content is highly accretive to YouTube penetration, in my view (see - Google Scaling Up Online Video).

Finally, VR will be another focus area given the amount of investments that Alphabet has dedicated. 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. (Google Making Next Big Steps Into Virtual Reality?) This suggests that Alphabet 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 Alphabet 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.