New ad formats and Google's latest hardware push will be under the microscope in Alphabet earnings

Ruth Porat
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New ads, YouTube, holiday hardware sales, and the fate of moonshot investments will all be in play during Google's earnings on Thursday.

Google parent Alphabet will report fourth-quarter earnings after the bell, and Wall Street expects adjusted earnings of $9.64 per share on revenue of $25.23 billion, according to a Thomson Reuters consensus estimate. Barring any adjustments, that would be up from earnings of $8.67 per Class A share on revenue of $21.33 billion in the year-ago period.

The search giant, which makes most of its money from advertising, will share how new ad formats helped improve business. New options, like promoted pins on Google Maps, could help sustain double-digit revenue growth in 2017, according to JMP Securities analyst Ron Josey.

"We expect the search business to be very constant," said James Wang, an analyst at ARK Invest. ARK Invest offers an internet innovation ETF composed of 3.36 percent Alphabet shares.

"People have been questioning the trajectory since the IPO and it has sustained itself remarkably well," Wang said. "Even with mobile where they get paid less. You would never be able to tell — you would just assume it's been a beautiful organic growth over that period of time."

But like its digital advertising rival, Facebook, Google has to make sure its advertisements don't overwhelm users, and may lead to fewer ads.

"If you use YouTube today, there are a lot of ads," Wang said. "We would be interested to hear any concerns about inventory."

Any slowdown in ad revenue growth could be offset by more cloud computing revenue and growing subscription revenue for YouTube, including its "Red" offering, Andy Hargreaves of Pacific Crest Securities wrote in a research note. In particular, a new live version of YouTube called "Unplugged" is reportedly in the works, and includes all of CBS' content, such as live NFL games, according to multiple media outlets.

"I think [Alphabet] will remain quite cagey about performance numbers, but I think it is encouraging that YouTube Red is actually getting recent traction on the Play Store," Wang said. "Prior to that, we were wondering if it would get any customers — paying for YouTube seems like an oxymoron."

Hardware and fiscal discipline

The company could also share some statistics about the success of the new Pixel phone and Google Home, its competitor to Amazon's Echo, during the holiday season.

Over the quarter, Google tried to further integrate its hardware and software businesses, starting with its first in-house phone design, Pixel, which commercializes Google's push toward virtual reality and artificial intelligence. Neil Doshi, managing director at Mizuho Securities, estimates that Google sold about 1 million Pixels during the quarter.

After Amazon's Alexa dominated artificial intelligence displays at technology tradeshow CES, ARK's Wang said he's eager to hear how the similar Google Home device has fared since its November debut.

The call will also be an opportunity for the company to reiterate its improved fiscal discipline under CFO Ruth Porat, who joined in 2015. One of the company's big moves under Porat was to split core Google (including search, Android, Chrome and YouTube) from "other bets," such as the Nest home automation products, venture investments and self-driving car technology (recently renamed Waymo).

In that "other bets" category, Porat has focused on projects that are "a sizable opportunity," trimming back projects that didn't show enough potential, such as the Fiber initiative, which was planning to deliver super-fast internet access to communities through fiber optic connections to homes. Wall Street has lauded the financial discipline, transparency and shareholder return of the Alphabet structure, even if the company has lost key staffers in the process.

"If you were to be very objective in how their strategy has been with moonshots, they've been a barrier, to be candid," said Wang. "Other than their autonomous car division — which is not making money but is one of the lead contenders for the autonomous race — all the other segments, Boston Dynamics, drone delivery, health-care bets, have not yielded any results. Ruth is right to shut them down. ... From a shareholder perspective, facing the music is a good thing."

"[Cutting other bets] is sobering, but a silver lining is they have conviction because they have found something under their nose where they can win: machine learning," Wang said.

Disclosure: JMP Securities makes a market in shares of Alphabet and expects to receive or intends to seek compensation for investment banking services from Alphabet in the next three months.