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3 things Alphabet (NASDAQ:GOOGL) investors should watch ahead of its earnings report

alphabet stock represented by man using Google search engine on computer
Alphabet is hoping for a return to revenue growth in the current quarter. Image source: Getty Images

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Although Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google is primarily a digital company with a minimal physical footprint, it is still negatively affected by the coronavirus pandemic. That's because many of the businesses that use its platforms for advertising are enterprises that rely on people to leave their homes to consume their products or services. 

Further, some companies in the leisure and hospitality areas are not permitted to reopen to the public. It follows then that such companies would have little need to advertise and, in fact, may need to shut off ad spending completely to conserve cash. That being said, people are spending more time at home and, as a result, more time on their computers or mobile devices conducting searches on Google or watching videos on YouTube. 

Those forces will be on display when Alphabet reports its third quarter results on Oct 29. Here are three critical factors to watch.

Alphabet is searching for an increase in revenue as businesses reopen 

First, you will want to look at the reported revenue growth. In the most recent quarter, revenue decreased by 2%. Even though there was more engagement with its services, the price of the services decreased. Investors will want to know what portion of overall revenue came from its lucrative Google Cloud business. That's because it's one of the more profitable areas of the company. An increase in the portion of revenue coming from Google Cloud is more likely to increase profits. 

Speaking of profits, that's the next important factor shareholders will want to look at in the report. In the most recent quarter, the company's operating margin decreased to 17% from 24% in the year prior. 

Lastly, those interested in Alphabet will want to observe how many shares of its stock the company purchased in the quarter. The board recently authorized an additional $28 billion of share repurchases, and the company still had $5.4 billion remaining from an existing program. Alphabet has one of the highest quality balance sheets with $121 billion in cash and marketable securities and only $4 billion in long-term debt as of June 30.

What this means for investors

The worst of the pandemic may be behind Alphabet as cities, states, and countries continue to allow more businesses to reopen. Those companies will need to get the word out that they are open and are likely to use Alphabet's platforms. 

The consensus revenue forecast among analysts on Wall Street is for $42.7 billion in the quarter and earnings per share of $11.09. The tech stock is up about 16% year to date and could have more room to run up if it reports better than expected results on Oct 29.

Additionally, if the stock drops after the report, Alphabet may use that as an opportunity to accelerate share buybacks.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Returns as of 6th October 2020

Parkev Tatevosian owns shares of Alphabet (C shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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