All Eyes on Alphabet (GOOGL) 1Q18 Print Tonight

SunTrust's Youssef Squali sets positive expectations for this evening's first quarterly print from GOOGL with new changes implemented in reporting.

Ahead of tonight’s earnings show, top analyst Youssef Squali at SunTrust pays attention to encouraging checks with marketers on Alphabet Inc (NASDAQ:GOOGL) throughout the first quarter and praises “attractive valuation” for this tech king. Google has been a king of growth, and the first quarter should showcase “sustained” momentum here. This growth is no small factor- especially when important question marks still circle margins, from climbing traffic-acquisition costs (TAC), as well as regulation in the wake of Facebook’s Cambridge Analytica blunder.

In anticipation of this evening’s quarterly performance, the analyst reiterates a Buy rating on GOOGL stock with a $1,225 price target, which implies a 14% upside from current levels.

“We remain vigilant about margin pressures from rising TAC and expenses related to Hardware, Cloud, and Content but believe sustained top line growth should overshadow such concerns. We’ll be listening to mgt’s commentary on GDPR and data privacy, given the rising specter of regulation post the FB/CA mishap. We believe core search remains insulated, but YT and Network are likely to have some exposure to these yet-to-be determined changes,” underscores Squali.

In a preview of the first quarter, the analyst forecasts 20.6% in year-over-year growth in revenue; 19.5% year-over-year in adjusted EBITDA; 21% year-over-year in ad revenues; 34% year-over-year in Google “Other Revenues” (not including smart-home company Nest; and 52% year-over-year in Other Bets. The analyst’s expectations essentially align with the Street, where net revenue estimates are set for $24,264 million and adjusted EBITDA for $12,044 million. In fact, Squali stands more bullish than the Street’s $9.33 GAAP EPS forecast with expectations for $9.70.

This will be Alphabet’s first print reported in a new way. First, Nest is shifting over from “Other Bets” to the “Google Other” business, which the analyst takes in bullish stride: “we believe it should be able to maximize the hardware synergies with Home and Pixel devices.” Second, the “Google Network” business is transitioning from percentage change in CPCs and Paid Clicks over to metrics in CPMs and Impressions, and Squali believes this “better reflects the drivers of this segment’s revenues.” Third, Google is presenting a new accounting standard for gains and losses that were never realized for publicly traded companies that will show up on the Income Statement, which before was exhibited on the Balance sheet. Fourth, there will also be a new accounting standard for gains and losses that were never realized for private companies to be demonstrated on the Income Statement, which before was not pinpointed on the company’s financial statements. Both of these new changes may lead to more volatility to the Other Income and Expense lines on Google’s Income Statement, notes Squali.

From Squali’s eyes, Google Sites shines as Google’s brightest revenue driver, with the analyst calling for gross revenues here to jump 23% year-over-year to $21,326 million; Google Network gross revenues to surge 13% year-over-year to $4,537 million; Google Other revenues to soar 34% year-over-year to $4,146 million (not including Nest); and Other Bets revenues to vault 53% year-over-year to $374 million.

The analyst fears steeply rising TAC will take a 23.7% slice of total ad revenue compared to the 21.6% seen in the first quarter last year, higher than the Street’s forecast of 23.4%. Meanwhile, amid FB’s “breach of consumer trust,” the analyst keeps a wary on regulation, which haunts as “both a short and long term concern.” Watch out for regulatory scrutiny both on the domestic front as well as abroad in the EU to get more intense, warns Squali. Yet, “we expect management to address and allay investor concerns on this topic. Management has already stated that it will be ready to comply across all its services with GDPR once it goes into effect,” comments the analyst. Still, Squali acknowledges apprehensions circle as to the effects of these changes on user and marketer engagement down the line. Meanwhile, with Google mid-investment cycle, the analyst sees margins under hot water for “a few more years to come.”

That said, the financial full-year guide looks strong, and the analyst angles for revenues to grow at a “very healthy” 21% year-over-year and adjusted EBITDA to leap 18% year-over-year, which essentially meets Street expectations. Looking ahead, the analyst forecasts $24,996 million in net revenues, $12,115 million in adjusted EBITDA, and $9.89 in GAAP EPS. For context, the Street calls for $25,243 million in net revenues, $12,425 million in adjusted EBITDA, and $9.93 in GAAP EPS. For full-year 2018, the analyst expects GOOGL to achieve $106,416 million in net revenues, $51,408 million in adjusted EBITDA, and $42.66 in GAAP EPS, with the Street projecting $106,773 million in net revenues, $51,395 million in adjusted EBITDA, and $41.51 in GAAP EPS. All eyes are watching this tech leader’s earnings showcase tonight.

Youssef Squali has a very good TipRanks score with a 70% success rate and an impressive ranking of #58 out of 4,783 analysts. Squali garners 20.0% in his annual returns. When recommending GOOGL, Squali earns 18.0% in average profits on the stock.

TipRanks highlights this tech titan has a strong bullish camp backing the company. Out of 27 analysts polled in the last 3 months, 25 are bullish on GOOGL stock while 2 remain sidelined. With a return potential of nearly 21%, the stock’s consensus target price stands at $1,306.00.

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