Alphabet (GOOGL) will report results for its first quarter of 2019 after market close today. With shares recently hitting 52-week highs, the earnings report comes at an important time for the stock. Can Alphabet continue to justify its pricey valuation?
With the company’s search and advertising business expected to sustain or extend its per usual growth CAGR of 20%+, the regulatory headwinds could add somewhat of a damper due to the passage of some controversial legislation referred to as the Copyright Overhaul in the EU. The EU has been a persistent thorn in the side of Alphabet, so any added commentary relating to its regulatory woes would be constructive on the company’s earnings call.
That being the case, investors should anticipate that with Alphabet’s solid track-record of delivering and meeting its own financial guidance that it will report revenue and dil. EPS above consensus estimates. Alphabet’s not known to be streaky, or to have lapses where the company’s unable to deliver on financial results for shareholders, as the company has been a steady growth vehicle for quite a while. Not to mention, the company’s advertising Suite is extremely competitive with more advertisers indicating that advertising ROI has improved with Google versus competitors.
Currently, the consensus anticipates that GOOGL will deliver revenue and dil. EPS of $37.34 billion and dil. EPS of $10.58. The company’s revenue is anticipated to grow by +19.9% y/y whereas the dil. EPS figure is expected to decline by -20.6% y/y. The divergence in earnings has to do with an anti-trust fine costing the company $1.7 billion, which they will recognize in Q1’19. To date, Alphabet has spent $9.4 billion relating to litigation related charges in the EU, which is why financial results have only soured on regulatory dynamics and financial settlements, as opposed to anything else, really.
The stock was mostly unaffected by the market correction, which sent the majority of stocks lower. Earnings results rarely miss expectations, but very rarely does Alphabet announce something so spectacular tied to its earnings results that investors should anticipate a meaningful jump following the announcement of earnings. It’s a great defensive growth stock with very limited volatility, so the plus side is that the low volume buying will likely continue regardless of whether Alphabet delivers a slight beat, or meets consensus estimates on both revenue and earnings.
Michael Pachter from Wedbush anticipates that Alphabet will report a slight beat on revenue however:
We assume year-over-year growth rates of 21.6% for Google Properties revenues, 13.6% for Google Network Members’ Properties revenues, 31.1% for Google Other revenues, and 13.3% for Other Bets revenues, resulting in an overall revenue growth rate of 21.7%. Our revenue growth estimate for Q1:19 compares to growth of 21.5% in Q4:18, and 25.8% in Q1:18, largely reflecting continued solid growth against an increasingly large and maturing base. We are maintaining our OUTPERFORM rating and 12-month price target of $1,350 per share. Our price target is based upon a multiple of roughly 14x our 2020 adjusted EBITDA estimate, a slight discount to the 15x valuation multiple we have assigned to Facebook and compared to Alphabet’s 5-year historical average of 11x.
Promising commentary heading out of the quarter relating to sustained advertising execution from a variety of Google properties, along with efforts to improve the ad-suite is customary to Google’s earnings announcements. GOOGL probably won’t deviate from that formula of discussing financial results. So as long as GOOGL can continue to illustrate impressions growth that offset a more competitive pricing environment for ad units, the quarter will be viewed as a success.
Also, the absence of EU related charges will make Q2’19 outlook that much better. Assuming they can get a tighter grip on regulatory challenges, investors will have fewer things to worry about. It might be wishful thinking, but one could hope.
TipRanks’ data shows an overwhelmingly bullish camp backing the tech giant. GOOGL stock has amassed 25 ‘buy’ ratings in the last three months, with just two analysts playing it safe with a hold rating. However, the 12-month average price target stands at $1,351.83, suggesting the stock has only 5% upside from current levels. (See GOOGL’s price targets and analyst ratings on TipRanks)
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