Today is the day Google enthusiasts have been waiting for: earnings day. Google’s newly formed parent company, Alphabet Inc (NASDAQ:GOOGL) will post Q4 earnings today after market close. Alphabet was formed last year to allow Google’s “moonshot” endeavors to focus on exploratory projects without worrying about impacting Google’s bottom line, which remains the core of the company. As such, the company will report earnings in two segments: Google and “Other Bets.” Top analysts Gene Munster of Piper Jaffray and Youssef Squali of Cantor weighed in with their pre-earnings expectations.
Munster estimates the company will post quarterly revenue of $16.76 billion and earnings per share of $8.45, but notes that FX headwinds will still have an impact. The analyst draws on the company’s Q2 earnings call, in which new CFO Ruth Porat clarified that revenue growth and expense management are not inherently incongruent. Munster comments, “We believe many investors were encouraged by that message given the relative maturity of the core business. While less important than the company’s segment profitability disclosure or overall revenue, we believe continued emphasis on this message would be viewed positively by investors.”
The analyst estimates that Alphabet’s “other bets” will rack up $3 to $5 billion in annual expenses. These offshoot projects include Nest, Life Sciences, Google Ventures, Google’s autonomous driving endeavor, and others. He explains, “If those projections are accurate, it would imply core Google EBITDA margins would be 500-800 bps higher than reported assuming minimal revenue from the other bets. If the other bets generate more meaningful amounts of revenue than our expectation, it would mean higher core Google EBITDA margins.”
Ahead of earnings, Munster maintains his Overweight rating on the company with an $812 price target, marking a 5% potential upside from current levels. Munster has a 58% success rate recommending stocks with an 18% average one-year return.
Squali is also looking forward to Alphabet differentiating between Google earnings and “other bets.” He explains, “Greater transparency for core Google vs. Other Bets should allow investors to get more insight into profitability/trends within core and non-core properties, potentially causing a re-rating of the stock. We also hope to see additional disclosures/commentary around core Google, namely Search vs. Display.”
He estimates the company will post Q4 revenue of $16.39 billion and EPS of $7.55, driven by Search and Display. Squali explains that Google continues to gain strength as the preferred search engine. Several research firms have indicated that search advertising revenue is increasing thanks to an “acceleration in mobile ad spend and in clicks.”
Overall, Squali maintains a Buy rating on GOOGL with an $880 price target, marking a 14% upside potential from current levels. Squali has a 58% success rate recommending stocks with a 14% one-year average return per rating.
According to TipRanks, 19 analysts are currently bullish on GOOGL while 1 remains on the sidelines. The average 12-month price target between these 20 analysts is $876.76, marking a 14% potential upside from current levels.