Google set to cap blockbuster year with sales gains

The company’s dominance in online search, video and internet ad sales made it one of last year’s leading beneficiaries of an upswing in digital advertising. Last year, small and large businesses alike flooded into the ad market in a bid to win customers who spent early parts of the pandemic sequestered in their homes.

On Tuesday, Alphabet is expected to report sales of $72.23 billion and profit of $19.91 billion for the October-to-December period, according to analysts surveyed by FactSet. The company posted $56.9 billion in sales and $15.23 billion in profit during the same period a year earlier, when the pandemic hampered growth.

The projected 27% increase in quarterly sales would be the lowest the company has recorded for a three-month period since late 2020 and marks a deceleration from the 41% increase reported in the July-to-September quarter. The moderating growth has divided investors, with some optimistic Google will extend its momentum over the coming year as Covid-19 wanes and travel returns, while others fear TikTok will dent YouTube’s video dominance and rising costs will cut into margins.

The divide has been apparent in the company’s share performance this year. After rising 65% last year, shares fell more than 10% in January.

Future Fund Active ETF manager Gary Black shrugged off the sliding share price, saying he expects Alphabet to maintain its momentum as ad dollars shift to YouTube and search from traditional TV.

“If you’re Pepsi or Ford, you’re looking for ways to communicate with your target audience and people don’t watch TV anymore,” said Mr. Black, whose fund has $100 million under management and counts Alphabet as its second-largest holding.

The biggest peril for Google comes from regulators in the U.S. and Europe who are filing lawsuits and proposing legislation to curtail its dominance. In the U.S., the company faces separate antitrust lawsuits against its ad-tech, search and app-store businesses, as well as state cases over claims it deceptively collected customers’ location information. In the U.S., it faces proposed legislation that would limit tech companies’ ability to preference their own businesses, as well as a new bill being led by Sen. Mike Lee (R., Utah) that would force it to divest its ad-tech unit.

At best, the challenges will saddle the company with legal fees and discourage acquisitions that could draw regulators’ ire, according to analysts. At worst, the company could be forced to unload some business units to comply with judicial rulings or new laws.

UBS Securities LLC analyst Lloyd Walmsley said in a note to clients that the onslaught should inspire the company to add a dividend for the first time, because putting “money in shareholders pockets might help with goodwill as regulation heats up.”

Much of Google’s growth over the past quarter came from more e-commerce advertisers eager to reach customers whose product searches begin online. When the pandemic necessitated that local business expand into e-commerce, Google partnered with Shopify Inc. to simplify search listings and ad purchases for millions of merchants.

Total advertising sales are expected to rise 27% to $58.67 billion in the December quarter. YouTube is forecast to be a major contributor to that with sales of $8.84 billion, bringing its total for the year to $29.06 billion, about $500 million less than Netflix Inc., the streaming-media subscription service.

Google has been pressed by investors to diversify beyond a digital ad business that still accounts for more than 80% of total sales. The company has invested heavily in building out a cloud-computing division that can compete with established players Amazon.com Inc. and Microsoft Corp., which account for 41% and 20% of the market, respectively.

In a bid to boost its 6% market share, Google has taken equity stakes in companies such as CME Group Inc. in exchange for long-term cloud contracts. The strategy is expected to help Google report cloud sales rose 45% to $5.57 billion in the period.