Can Alphabet Inc earnings beat estimates again in Q4? Here’s why GOOGL stock looks set for a good 2017.
Google’s parent company, Alphabet Inc (NASDAQ:GOOGL) is scheduled to report its earnings on 26th January after the markets close. After 3 consecutive blockbuster quarters of double-digit YoY (Year-on-Year) revenue growth of 17%, 21%, and 20% respectively, there is a lot of pressure on Alphabet to end the year on a high note. Further, the company exceeded expectations of both EPS and revenue in the previous quarter, which has raised the expectations of a repeat performance in Q4. Alphabet posted phenomenal Q3 results, thanks to Google’s increasing number of aggregate paid clicks, despite the declining average cost per click in its advertising business. Should you buy GOOGL stock going into Q4 earnings with heightened expectation?
Before deciding to buy Alphabet stock, one should be aware of few things. Even after posting impressive numbers in its previous quarters, GOOGL stock badly underperformed the market in 2016, finishing with a modest return of just 2%. GOOGL stock was also the underperformer among the FANG group of stocks. Given its size, Alphabet has still continued to grow in double-digits, which makes many believe GOOGL stock is undervalued, and 2017 may be the year when it outperforms.
Alphabet Inc Stock To Breach $1000 In 2017?
A recent Barron’s post stated that GOOGL stock would breach the $1000 mark by the end of 2017, which represents an upside potential of more than 18% from yesterday’s closing price. The post considers digital ad growth and YouTube as the primary drivers for GOOGL stock. The post highlights a study which states that digital ad spending continues to rise at a fast pace, and is set to capture 50% share of advertising spends by 2021, as TV ad-spends continue to shrink. The study also states that “mobile will reach 52% of digital ad spends this year and that by 2021, mobile’s share will balloon to 72%.”
The above two factors are seen as the catalysts for Alphabet’s growth going forward. Quoting from the Barrons post:
“It owns the world’s leading search business in Google, along with the top operating system for mobile phones, Android, which helps give Google a dominant share in mobile searches. YouTube, we have argued, is the world’s most valuable video streaming service”
Alphabet Inc cannot only rely on its search business to thrive, it’s high time the company’s “other bets” start to bear fruits. Investors would also be expecting some updates about Google’s other promising products, like its Pixel phone and its Google Home device. Though Google is playing catch up in the cloud business, it is expected to make significant progress from its present position, with a meager 5% market share. It is expected to win more market share by differentiating itself using its expertise in artificial intelligence and machine learning. There are threats from rivals like Facebook (NSDQ:FB) and Amazon (NSDQ:AMZN), but Alphabet is expected to fend off these threats.
Q4 Earnings Expectations
In the previous quarter, Alphabet Inc posted an EPS of $9.06, on revenues of $22.5B, up significantly from the $7.35 EPS and $18.7 billion revenue it posted in the year-ago quarter. Alphabet has average analyst EPS and revenue estimates of $9.63 and $25.1B for the year-ending fourth quarter. This represents a rise of 18% in revenue and 11% in EPS, year over year. However, the analyst estimates seem to be on the conservative side, following Alphabet CFO Ruth Porat’s word of caution during the company’s third-quarter earnings call where she stated that it will be a daunting task for the company to beat tough year-ago revenue comparisons in the fourth quarter.
One metric which investors need to watch closely in Alphabet’s latest earnings is the company’s operating margin, given that operating margins have fallen sharply from 35.4% in 2010 to 26.3%, as of the latest quarter. There has been a lot of pressure on the tech giant’s margins, and declining margins do not augur well. Tough competition from Facebook also has not hurt Google’s cause, and traffic acquisition costs are also on the rise. Alphabet investors have had a lukewarm response to Alphabet’s impressive growth metrics. Investors will be hoping that GOOGL stock can set the ball rolling in 2017 with a strong Q4 earnings display.
Alphabet Inc Reversing the 2016 Trend Going Into Q4 Earnings
It seems GOOGL stock is set to make amends in 2017, for its underperformance last year. GOOGL stock is already up by almost 7% YTD. Alphabet has turned more aggressive to make its ‘other bets’ deliver results. The commercialization of its self-driving cars, with its new subsidiary, Waymo, is one such example. That Alphabet is tightening the screws on its ‘moonshot’ projects, is welcome news for investors. Alphabet Inc is poised for solid growth ahead, riding on the success of its cash cow, Google. However, any surprise success from its ‘other bets’ could drive the stock much higher. GOOGL stock looks set for far better returns in 2017 compared to 2016.
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