WAYMO IMPORTANT

Stop kidding yourselves. The only thing that matters about Alphabet is Google’s ad business

On Oct. 26, Alphabet will announce its third-quarter earnings. And for all the excitement around self-driving cars, internet-emitting balloons, curing death, and even some new telephones, the only thing that will really matter to Wall Street and investors is just how much money Google’s advertising business is bringing in.

Analysts collected by FactSet expect Alphabet’s quarterly revenue to come in at $21.9 billion, which would be a drop of about 2% from the $22 billion the company posted in the same quarter last year.

Last quarter was the company’s second-best ever, generating $26 billion in revenue (up more than 20% from the same period in 2016), with roughly 87% of that coming from advertising sales on its own sites, mobile apps, and other sites. Advertising is the biggest driver of revenue (and profit) for Alphabet, and that does not look likely to change in the foreseeable future.

But Alphabet is obviously concerning itself with the road ahead. In the short term, the company is testing out revenue stream-diversifying products that include YouTube TV, the paid cable-like subscription service; YouTube Red, an original-content video service; and Google Play Music, Google’s answer to Spotify.

It’s also doubling down on hardware: The company recently agreed to purchase part of the phone manufacturer HTC’s hardware division, and released a litany of new products, including the Google Pixel 2 phone and new variations of its Home smart speakers. But there’s little indication that these efforts will amount to much more than keeping customers using Google services at all times, and therefore opening them up to seeing more Google ads.

Even longer term, Alphabet has its “Other Bets” bucket of companies, including Waymo, Verily, Jigsaw, and Calico, each researching an idea that could potentially change the world. But all of these “moonshots” don’t come cheap. To date, the majority of revenue brought in by Other Bets came from companies Alphabet acquired, such internet-of-things company Nest; or other services, like Fiber, that were previously Google projects. Self-driving cars or life-saving products may one day be a boon for Alphabet’s bottom line, but their research continues to be costly. Last quarter, the moonshots lost $772 million, and the segment has lost at least $0.5 billion every quarter for the last 11 quarters:

What continues to matter to Alphabet’s bottom line, then, is where its advertising dollars are coming from. Look to see whether there is continued growth in Google and YouTube’s ad revenue (which Google calls “paid clicks”), and whether the cost of getting those clicks has continued to rise. As long as Google can keep raking in the ad dollars, the rest of Alphabet will have the funds to change the world, or burn through billions of dollars trying to.

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