Alphabet Earnings Risk – Alphabet Inc. (NASDAQ:GOOG)

If you dig in, there are a few issues building with Alphabet/Google (NASDAQ:GOOG) (NASDAQ:GOOGL). Search is showing some weakness. YouTube isn’t the big driver, not yet. When you map out what’s driving earnings, it spells earnings risk ahead.

First, let’s get YouTube out of the way.

YouTube Is Not A Major Earnings Driver… Not Yet

When we do work on a company we want to see what businesses will be meaningful to revenue and earnings growth. Most important is earnings growth because stocks are valued on earnings. We don’t mind looking out to 2018 at this point, but we want to know what’s going to drive earnings so we can figure out a valuation.

As for YouTube, we agree it’s a big opportunity in a few years. For now the company said that YouTube has 1.5B users that use YouTube on average 60 minutes per day. The potential is enormous. But it’s not a big driver to earnings yet as we’ll show.

We think earnings over the next 9, 12, 15 months drive stocks. Know what are earnings going to do in that time and you can have an idea where stocks can go in that time.

We don’t think YouTube is the driver in that time frame for Alphabet.

What really matters for Alphabet earnings and so Alphabet shares is search, as we’ll show.

As for YouTube, usually when a company has 10% of their revenues from a particular business, they’ll break it out for you. Alphabet has yet to break out YouTube as a separate business which tells us it may not be 10% of revenues. Street estimates say it could be over $10B. With revenues for the total company at $99B over the last four quarters, it may be close to $10B.

YouTube Is Lower Margins Than Search

This is from Alphabet’s 10-K,

“As interactions between users and advertisers change, we continue to expand and evolve our product offerings to serve their changing needs. Over time, we expect our monetization trends to fluctuate. For example, we have seen an increase in YouTube engagement ads, which monetize at a lower rate than traditional desktop…

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