North America

Earnings Preview: Alphabet Inc. Q3 2017 (GOOGL)

By: Craig Bowles

Overview

Alphabet, Inc. (GOOGL) is scheduled to report 3Q2017 earnings after the close of trading on Thursday, October 26th.  Results are usually available minutes after the closing bell with a conference call webcast at Alphabet Investor Relations slated to begin at 4:30 p.m. ET. The S&P E-Mini, NASDAQ 100 E-Mini futures contracts and PowerShares QQQ (QQQ) tend to see active trading off the results. Alphabet Inc. replaced Google Inc. as the publicly-traded entity. The company has implemented segment reporting, where Google financials are provided separately than those for the rest of Alphabet businesses as a whole.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): (If an EPS ex-items is available, that measure will be the comparable value.) The Street estimate is $8.33 (range $7.49 to $9.07) (Source: Yahoo! Finance). Consensus was $8.47 three months ago.
  • Revenue Ex-Traffic Acquisition Costs: The Street consensus is $21.94 bln. (Source: Zack’s.com)
  • Paid Clicks Q/Q Change: Q2 was 12%.
  • Cost per Click Q/Q Change: Q2 was -6%.
  • Alphabet’s Price/Earnings of 36.7 compares to a 5-year average of 27.9, Price/Book of 4.7 compares to a 5-year average of 3.9, Price/Sales of 7.1 compares to a 5yr average 5.9, and Price/Cash Flow of 19.5 compares to a 5-year average of 18.7.
  • Analysts remain bullish on Alphabet with 37 (42 three qtrs. ago) Buy, 6 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • GOOG insiders sold 48,139 shares over the last three months and sold 1,288,922 shares in the past year. (source: NASDAQ.com) A buyback announcement is expected with $92.4 billion in cash and investments available. The company increased the stock buyback to $7 billion in October 2016. The 2015 $5 billion allotment was their first since 2010.
  • Alphabet shares have a 1-day average price change on earnings of 3.00%. Options are pricing in an implied move of 4.33% off earnings.

Recent News

  • 10/12: Alphabet Inc’s Waymo sought at least $1 billion in damages and a public apology from Uber Technologies Inc for using Waymo technology, according to Reuters.com.
  • 10/11: Credit Suisse reiterated its Outperform rating on Alphabet premised on a trio of factors: 1) the ongoing monetization improvements in search through product updates such as expanded text ads and individual bid adjustments; 2) increased contribution from non-search businesses such as YouTube, Google Play and Cloud; 3) optionality presented by new monetization initiatives such as Maps and eventual commercialization of Google’s Other Bets such as Waymo, Life Sciences, etc., according to Benzinga.com.
  • 10/10: Jefferies reiterated a Buy rating on Alphabet citing a compelling valuation and “multiple new initiatives in place (including Google Cloud and recently raised bets on hardware) which could provide a boost to numbers,” according to StreetInsider.com.
  • 10/09: Alphabet is hoping to test its experimental Project Loon balloon technology to restore wireless service in Puerto Rico, according to Barron’s.com.
  • 10/03: KeyBanc Capital says YouTube TV is unlikely to be profitable on a standalone basis but can reach 2 million subscribers by the end of 2018, offering a “significant strategic benefit” to its parent Alphabet, according to Barron’s.com.
  • 09/29: Morgan Stanley reiterated an Overweight rating on Alphabet after concluding that a beat on revenue in Q3 can return “turn sentiment” and bring investors back to its lagging stock, according to Barron’s.com.
  • 09/21: Google is paying $1.1 billion for the smartphone expertise from struggling Taiwanese manufacturer HTC, according to a post on CNN.com.
  • 09/21: Berkshire Hathaway’s Warren Buffett believes that Google has too much technological uncertainty in the long-term, according to a post on Forbes.com.

Summary

Alphabet had a $2.7 billion fine by the EU last quarter, so further investigations and rulings are always a worry. Investors are also interested in advertising changes and the continued ability to monetize search. A stock buyback announcement is expected. Analysts remain bullish on the promise of digital advertising growth and stock buybacks.  Insider selling lightened up the past three months. Over the past four quarters, the average beat/miss is by 40c. Estimize consensus for a EPS of $8.62 on revenue ex-TAC of $22.067 bln compares to analyst consensus for a EPS of $8.33 on revenue ex-TAC of $21.94 bln.

 

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