North America

Earnings Preview: Alphabet Q2 2017 (GOOGL)

By: Craig Bowles

Overview

Alphabet, Inc. (GOOGL) is scheduled to report 2Q2017 earnings after the close of trading on Monday, July 24th.  Results are usually available minutes after the closing bell with a conference call webcast at Alphabet Investor Relations slated to begin at 5:00 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): The Street estimate is $8.26 (range $7.54 to $8.69) (Source: Yahoo! Finance). Consensus was $8.08 three months ago.
  • Revenue Ex-Traffic Acquisition Costs: The Street consensus is $20.83 bln. (Source: Estimize.com)
  • Paid Clicks Q/Q Change: Q1 was 2%.
  • Cost per Click Q/Q Change: Q1 was -4%.
  • Alphabet’s Price/Earnings of 33.4 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 7.3 compares to a 5yr average 5.9, and Price/Cash Flow of 18.2 compares to a 5-year average of 18.7.
  • Analysts remain bullish on Alphabet with 36 (42 two qtrs. ago) Buy, 6 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 123,735 shares over the last three months and sold 1,899,291 shares in the past year. (source: NASDAQ.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 4.47%. Options are pricing in an implied move of 2.78% off earnings.

Recent News

  • 07/12: Google will not have to pay €1.12bn in back taxes to France, according to ft.com.
  • 07/10: Credit Suisse conversations with advertisers during 2Q17 suggest ongoing strength in budget deployment across search and YouTube based on the following factors: 1) ongoing ramp in mobile search traffic, 2) CPC benefits from Expanded Text Ads and the elimination of Enhanced Campaigns, 3) location based targeting, opening up opportunity to drive offline activity, 4) rotation of YouTube budgets out of 1Q17 and into 2Q17 as some advertisers paused their spending late in 1Q17. As a result we have increased our YouTube growth estimate for 2Q17 from 21% to 31% (FX-neutral basis), according to Barron’s.com.
  • 06/27: The European Commission (EC) hit Google with a record $2.7 bln fine for a breach of antitrust, according to Barron’s.com.
  • 06/23: Alphabet’s Google will stop scanning Gmail content for creating personalized ads, according to a post on StreetInsider.com.
  • 06/15: Canaccord Genuity downgraded Alphabet to Hold from Buy citing that much of the growth over the past two years is due to ad load increases on mobile search and YouTube, which (especially the former) will be hard to repeat and a P/E of ~24x is expensive by historical standards, according to a post on StreetInsider.com.

Technical Review

Alphabet shares made an all-time high in June at 1,008.61 and is nearing that level going into earnings, so this is becoming routine ahead of each earnings release. GOOG tends to lead GOOGL in intraday trading. The balance area around $960 could be broaden into a chaos pattern. (Chart courtesy of StockCharts.com)

Summary

Alphabet $2.7 billion fine by the EU will have investors interested in advertising changes and the continued ability to monetize search. Another worry is further investigations and rulings. 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 36c. Estimize consensus for a EPS of $8.16 on revenue ex-TAC of $20.948 bln compares to analyst consensus for a EPS of $8.26 on revenue ex-TAC of $20.83 bln.

 

DISCLAIMER:  By using this report, you acknowledge that Selerity, Inc. is in no way liable for losses or gains arising out of commentary, analysis, and or data in this report. Your investment decisions and recommendations are made entirely at your discretion. Selerity does not own securities in companies that they write about, is not an investment adviser, and the content contained herein is not an endorsement to buy or sell any securities. No content published as part of this report constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person.