North America

Earnings Preview: Alphabet Inc. Q4 2016 (GOOGL)

By: Craig Bowles

Overview

Alphabet, Inc. (GOOGL) is scheduled to report 4Q2016 earnings after the close of trading on Thursday, January 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.

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Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): The Street estimate is $9.63 (range $9.01 to $10.67) (Source: Yahoo! Finance). Consensus was $9.65 three months ago.
  • Revenue Ex-Traffic Acquisition Costs: The Street consensus is $20.51 bln. (Source: Estimize.com)
  • Paid Clicks Q/Q Change: Q3 was 9%.
  • Cost per Click Q/Q Change: Q3 was -5%.
  • Alphabet’s Price/Earnings of 30.3 compares to a 5-year average of 27.9, Price/Book of 4.3 compares to a 5-year average of 3.9, Price/Sales of 6.7 compares to a 5yr average 5.9, and Price/Cash Flow of 17.6 compares to a 5-year average of 18.7.
  • Analysts remain bullish on Alphabet with 42 Buy, 3 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • 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 4.98%. Options are pricing in an implied move of 4.09% off earnings.

Recent News

  • 01/21: Digital ad growth and YouTube will lift Alphabet 20%. YouTube has quietly made Alphabet a major player in social media. (Digital spending is expected to steadily increase and capture a 50% share by 2021, while TV spending will barely expand and its share will shrink to 33%.), according to Barron’s.com.
  • 01/12: Cantor Fitzgerald has Alphabet among their “best ideas” with Internet business are accelerating, according to Barron’s.com.
  • 01/12: Credit Suisse lists Alphabet as one of three large-cap favorites for 2017 while citing catalysts from ongoing monetization improvements in Search advertising, larger-than-expected contribution from Google’s larger non-search businesses, and shareholder value creation from new monetization initiatives such as Maps, according to a post on Barron’s.com.
  • 01/03: Oakmark fund’s Bill Nygren thinks YouTube’s very undervalued and Alphabet has $130 per share in cash on its balance sheet, a massive sum that investors are not fully taking into account, according to a post on Barron’s.com.
  • 12/14: Alphabet has moved its autonomous vehicle project from Google X to a stand-alone entity within Alphabet and shifted the emphasis from fully autonomous cars without steering wheels to a robo-taxi service that is open to commercial applications and partnerships. Morgan Stanley thinks Alphabet’s formation of Waymo symbolizes a less ambitious, diversified approach, according to a post on Barron’s.com.

Technical Review

Alphabet shares are testing October’s all-time high ahead of earnings again. The stock sold off shortly after earnings despite the beat. Point and figure technicians have increased their bullish price objective to $954 from $879. (Chart courtesy of StockCharts.com)

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Summary

Alphabet continues to have a bullish analyst following and that only increases with 2017 expected to see digital advertising overtake television.  A second stock buyback since 2010 should help limit downside. Over the past four quarters, the average beat/miss is by 46c. Estimize consensus for a Non-GAAP EPS of $9.78 on revenue ex-TAC of $20.641 bln compares to analyst consensus for a Non-GAAP EPS of $9.63 on revenue ex-TAC of $20.514 bln.

 

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