Alphabet reports earnings today, and profits are expected to take a big hit

Key Points
  • Alphabet is expected to report second-quarter sales of $25.7 billion.
  • The company is benefiting from a surge in sales of mobile video and search ads.
  • Profit will likely be hurt by a big fine from EU regulators.
Alphabet earnings on deck as investors focus on cloud business
Alphabet earnings on deck as investors focus on cloud business

Alphabet is expected to report second-quarter revenue growth of 20 percent on Monday, driven by rising sales from Google's mobile ads and YouTube videos.

Google and rival Facebook are racing to add more video content as the market for digital video ads looks to be quickly merging with more traditional TV advertising. The company said last month that YouTube now has 1.5 billion monthly users.

By adding free content made by amateurs and more expensive clips from professionals, Google and Facebook captured 85 percent of the growth in the online ad market last year, according to a June report from Mary Meeker, a former internet analyst who's now a partner at venture firm Kleiner Perkins Caufield & Byers.

Analysts expect Alphabet to report revenue of $25.6 billion, up 19 percent from $21.5 billion a year earlier, according to a Thomson Reuters survey. That total excludes traffic acquisition costs (TAC), or the fees Google pays to online publishers who refer traffic.

Here's what to expect from Alphabet earnings
Here's what to expect from Alphabet earnings

The EU fine will pull down profit

Alphabet's profit will be hurt by a $2.74 billion fine from European regulators for Google's practice of favoring its online shopping service over competitors.

Alphabet said in a recent securities filing that it will book an accounting charge for the entire amount in the quarter, which ended in June.

The fine was levied by Margrethe Vestager, competition commissioner for the EU, who ruled Google used its monopoly position in search advertising to hurt rivals.

The company is expected to report a profit of $4.46 a share, based on the average analyst forecasts compiled by Thomson Reuters, down from $8.42 a year earlier — reflecting the impact of the EU fine.

Alphabet's "other bets" segment likely contributed to the drop in profit. Mark Mahaney, an analyst at RBC Capital Markets, estimated in a report that the unit, which includes self-driving cars, posted an operating loss of $977 million.