Advertising revenue will be a focal point of Alphabet’s third quarter – October 24, 2022

Alphabet (GOOGL Free Report), is expected to release its quarterly results on October 25eafter market close.

The company’s advertising results will no doubt be a critical output metric, as it is a massive source of revenue for the company.

Using the quarterly results we’ve already received from Snap (INSTANTANEOUS Free Report), we can better understand how the advertising market is currently.

Let’s take a closer look.

Cooling of the advertising market?

Snap reported third-quarter earnings of $0.08 per share, beating Zacks’ consensus EPS estimate and reflecting a 50% year-over-year decline.

Snap generated $1.1 billion in revenue throughout the quarter, missing Zacks Consensus’ sales estimate by about 1.5%, but reflecting a 6% year-over-year increase.

However, the digital advertising market has faced a few speed bumps.

In a letter to its shareholders, SNAP said: “We are seeing our advertising partners across many industries reduce their marketing budgets, particularly in the face of operating environment headwinds, inflation-induced cost pressures and rising cost of capital.”

Obviously, that’s not good news to hear if you’re Alphabet, which is also heavily dependent on ad revenue.

For the quarter, Zacks’ consensus estimate for Alphabet’s ad revenue was $57.6 billion, suggesting a 2.4% sequential increase and a 12% year-over-year increase.

In its most recent quarter, Alphabet’s ad revenue came in at $56.2 billion, missing Zacks’ consensus estimate by just 0.3%, breaking a string of positive surprises.

Performance and valuation of shares

Alphabet shares have seen adverse price action since the start of the year, down almost 30% and significantly underperforming the broader market.

Image source: Zacks Investment Research

Over the past three months, however, GOOGL shares have traded in line with the broader market, down just under 5%.

Zacks Investment Research
Image source: Zacks Investment Research

While the price action for GOOGL shares since the start of the year leaves much to be desired, the near-term price action indicates that sellers may be losing control.

Following the 2022 sell-off, GOOGL shares became relatively cheap; The company’s 19.9X forward earnings multiple is well below its five-year median of 26.7X and reflects a 6% discount to its Zacks Computer and Technology sector.

Zacks Investment Research
Image source: Zacks Investment Research

Quarterly estimates

Analysts have been bearish in their earnings outlook, with two negative revisions to earnings estimates in recent months. The Zacks Consensus EPS estimate of $1.25 suggests a decline in Y/Y earnings of around 10%.

Zacks Investment Research
Image source: Zacks Investment Research

However, the company’s turnover is in better health; Zacks Consensus’ sales estimate of $58.4 billion indicates year-over-year revenue growth of nearly 9%.

Conclusion

With Snap witnessing an advertising slowdown, it’s worth comparing the company’s quarterly results to see how it might compare to the next version of Alphabet.

Currently, the Zacks consensus estimate for GOOGL ad revenue shows a sequential and Y/Y uptick, undoubtedly positive.

Alphabet has struggled to top quarterly estimates lately, falling short of Zacks’ EPS and consensus sales estimates in consecutive quarters.

Sallie R. Loera