Alphabet reports earnings on Monday — investors want strong numbers amid ad threats from Amazon

Key Points
  • Facebook and Google are increasingly seeing challenges to their digital ad share from Amazon.
  • Meanwhile, Alphabet's costs to doing business have gotten steeper. 
  • Alphabet could still impress investors outside its advertising revenue, though. 
Watch these two big metrics in Alphabet's earnings report

Alphabet is set to report fourth-quarter earnings Monday. Investors will want to see strong advertising numbers amid threats from Amazon and rising costs to doing business.

Google, which makes up the vast majority of Alphabet's business, is increasingly seeing Amazon encroach into its core advdertising business. Revenue in Amazon's "Other" category — which the company says is "primarily" made up of ad sales — more than doubled from 2017 to 2018, coming in at $10.1 billion last year, according to financial filings. CNBC reported in October that some advertisers were moving as much as half their search budget from Google to Amazon.

Meanwhile, Alphabet's costs of doing business have gotten steeper.

Traffic acquisition costs — the fees Google pays to companies like Apple to be the default search engine — are projected to reach $7.62 billion this quarter, according to StreetAccount.

That's an increase of 16 percent from the previous quarter and of 18 percent from the fourth quarter of 2017 — a significantly larger jump than the 2 percent to 3 percent changes that Google's seen in TAC in recent periods.

TAC as a percent of advertising revenue is forecast at 23 percent, in line with previous quarters.

Net income for the fourth quarter is expected to dip from the previous quarter. FactSet consensus estimates put profit at $7.64 billion, down from $9.19 billion during the third quarter.

All of that on top of growing revenue suggests a slimmer margin.

Indeed, Alphabet is expected to post $38.9 billion in revenue for the fourth quarter, according to Refinitiv consensus estimates, an increase of 15 percent from the third quarter and 20 percent from the year-ago quarter. But quarterly operating margins are projected at 22 percent, according to StreetAccount, down from 24 percent and 25 percent from the previous quarter and the year-ago quarter, respectively.

Outside advertising

Alphabet could still impress investors outside its advertising revenue, though.

The company's "other revenues" segment, which includes its cloud business and hardware sales, grew 29 percent last quarter and is projected to jump 37 percent for the fourth quarter, according to StreetAccount.

"Other Google revenue is becoming a larger portion of the mix as cloud, Android, and hardware are growing at a faster rate combined than advertising revenue," analysts with KeyBanc wrote in a note published last week. "We see the potential for slight weakness in [Google] Play from slower game approvals in China, but believe hardware and cloud should help sustain significant growth in the category as a whole."

Analysts are also expecting higher revenue in the company's "Other Bets" category that houses Alphabet's other companies like health venture Verily and self-driving start-up Waymo. The segment is expected to post revenue of $187.4 million, according to StreetAccount, up from $146 million during the third quarter.

WATCH: Expect Google surge after earnings like Facebook, says portfolio manager

Expect Google surge after earnings like Facebook, says portfolio manager