- Analysts estimate EPS of $27.14 vs. $22.30 in Q4 FY 2020.
- Traffic acquisition costs are expected to rise YOY.
- Revenue is expected to increase, but at its slowest pace in four quarters.
Google parent Alphabet Inc. (GOOGL) has had an exceptional 2021 fiscal year thus far, with profits and revenue growing at a rapid pace during the first three quarters. Google, like other big technology companies, has benefitted from greater online activity during the COVID-19 pandemic. However, there are signs that growth is slowing. To address that, Google is taking several steps to maintain its pace of growth, including a $1 billion in a partnership with telecommunications giant Bharti Airtel Ltd. That deal could speed up Google’s growth in India, an untapped digital market and the world’s second most populous nation.
Investors will be watching to see if Google is able to maintain its strong earnings and revenue growth when it reports earnings on Feb. 1, 2022 for Q4 FY 2021. Note that Google is a subsidiary of Alphabet, but it runs most of the parent company’s businesses, including its search business. Analysts expect the company’s earnings per share (EPS) to rise at its slowest pace in six quarters as revenue expands at its slowest pace in four quarters.
Investors will also focus on Google’s traffic acquisitions costs, a key metric that essentially gauges the amount the company pays to get people on its website and to keep them there. Analysts expect traffic acquisition costs to rise, but at a slightly slower pace than the company’s revenue growth.
Shares of Alphabet have outperformed the broader market over the past year. The stock’s outperformance gap with the rest of the market began to widen significantly in late March 2021. Despite brief pullbacks, the stock continued to rise faster than the market until late in the year. But since at least the beginning of January 2022, the stock has fallen faster than the market. Alphabet’s shares have provided a total return of 43.9% over the past year, well above the S&P 500’s total return of 17.0%.
Google (Alphabet) Earnings History
Google reported Q3 FY 2021 earnings results that beat analysts’ expectations. EPS rose 70.7% compared to the year-ago quarter, a robust pace but significantly slower than the previous quarter. Revenue expanded 41.0% year over year (YOY), decelerating from the previous quarter’s pace. The company highlighted the role its cloud services were playing in the ongoing shift to hybrid work and digital transformation many businesses and organizations are undergoing.
In Q2 FY 2021, Google reported earnings and revenue that surpassed consensus estimates. EPS increased 169.1% YOY, the fastest pace since the second quarter of FY 2019. Revenue grew 61.6% compared to the year-ago quarter, marking its fastest pace in at least 13 quarters. Google said that its strong revenue results reflected an increase in consumer online activity and broad-based strength in spending from advertisers.
Analysts expect both earnings and revenue growth to slow significantly in Q4 FY 2021. EPS is expected to rise 21.7% YOY, its slowest pace since Google reported a decline in Q2 FY 2020. Revenue is forecast to grow 26.8% YOY, which would be its slowest pace since the fourth quarter of FY 2020. For full-year FY 2021, analysts expect EPS to increase 85.4%, which would be the fastest pace since FY 2018. Annual revenue is forecast to rise 39.4%, the fastest pace in at least five years.
|Google (Alphabet) Key Stats|
|Estimate for Q4 FY 2021||Q4 FY 2020||Q4 FY 2019|
|Earnings Per Share ($)||27.14||22.30||15.35|
|Traffic Acquisition Costs ($B)||12.9||10.5||8.5|
Source: Visible Alpha
The Key Metric
As mentioned above, investors will also be focused on Google’s traffic acquisition costs, a critical component of the company’s overall cost of revenue. Google’s search access points and services are made available to Internet users by the company’s distribution partners, such as browser providers, mobile carriers, original equipment manufacturers, and software developers. Traffic acquisition costs comprise fees paid to these distribution partners as well as amounts paid to the company’s network members, mostly for advertisements displayed on those members’ websites.
While Google’s revenue has grown quickly recently, it is important to keep an eye on how fast its costs are rising as well. If costs rise faster than revenue, then its earnings growth may not be sustainable. Investors may also want to watch for any discussion in the company’s earnings report or on its conference call relating to supply chain disruptions, since higher costs for companies due to these disruptions could cause them to cut back on their advertising spending. That would likely lead to less revenue for Google.
Google’s annual traffic acquisition costs have continued to rise over the past several years, but have done so at a decelerating pace. In FY 2017, traffic acquisition costs rose 29.1%, faster than the company’s overall revenue growth of 22.8%. However, growth in traffic acquisition costs slowed over the next few years to a pace of just 8.9% in FY 2020, which was slower than Google’s overall revenue growth of 12.8%. Quarterly traffic acquisition costs in FY 2021 have begun to rise at a much faster pace than in previous years. The first quarter saw those costs increase 30.3% before accelerating to a pace of 63.3% in the second quarter. They slowed to 40.8% in the third quarter and analysts expect a further deceleration to a pace of 23.1% in Q4 FY 2021. For full-year FY 2021, analysts expect traffic acquisition costs to rise 37.0%, which would be the fastest pace in at least five years. However, those costs would rise at a slightly slower pace than the expected 39.3% growth in annual revenue.