North America

Earnings Preview: Alphabet Q4 2015 (GOOGL)

By: Craig Bowles

Overview:

Alphabet, Inc. (GOOG) (GOOGL) is scheduled to report 4Q2015 earnings after the close of trading on Monday, February 1st.  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. EST. 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 will implement segment reporting for 4Q results, where Google financials will be 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 $8.10 (range $7.32 to $8.59) (Source: Yahoo! Finance). Consensus was $8.09 three months ago.
  • Revenue Ex-Traffic Acquisition Costs: The Street consensus is $16.866 bln. (Source: Estimize.com)
  • Paid Clicks Q/Q Change: Q3 was 6%. Last year’s Q3 was 2% and Q4 jumped to 11%.
  • Cost per Click Q/Q Change: Q3 was -1%. Last year’s Q3 was 0% and Q4 fell to -3%.
  • Alphabet’s Price/Earnings of 33.1 compares to a 5-year average of 25.6, Price/Book of 4.2 compares to a 5-year average of 3.8, Price/Sales of 6.9 compares to a 5yr average 5.7, and Price/Cash Flow of 19.0 compares to a 5-year average of 18.0.
  • Analysts remain bullish on Alphabet with 42 Buy, 3 Hold, and 0 Sell ratings (source: MarketBeat.com).
  • Insiders sold 369,418 shares over the last three months and sold 595,568 shares in the past year. (source: NASDAQ.com) The company announced a $5.1 billion stock buyback in October, their first since 2010.
  • Alphabet shares have a 1-day average price change on earnings of 5.50%. Options are pricing in an implied move of 5.96% off earnings.

 Recent News

  • 01/26: SunTrust maintained a Buy rating with a price target of $850 on Alphabet with expectations for robust results in Q4 following improved transparency and shareholder-friendly actions, according to a post on Benzinga.com.
  • 01/26: Alphabet’s new deal with the United Kingdom’s tax authority will see it pay £130 million ($185 million) in back taxes from the last 10 years and may mark the start of intensified tax wrangling for the tech giant in Europe, according to a post on Quartz.com.
  • 01/22: Morgan Stanley has an Overweight rating on Alphabet with a price target of $820 price target and sees the $1 billion payment to Apple (AAPL) as bullish (if true) and an inexpensive “traffic acquisition cost”, according to a post on Barron’s.com.
  • 01/21: Pacific Crest wrote that Facebook (FB) with 33% and Alphabet’s with 25% of display ad spending making their dominance unquestioned, according to a post on Barron’s.com.
  • 01/14: Citigroup has a Buy rating on Alphabet stock with an $890 price target wrote that third party data shows YouTube remained strong in 4Q15 with viewing growth of 74% y/y accelerating from last quarter’s growth rate of 65%. December set a new record, according to a post on Barron’s.com.
  • 01/12: Credit Suisse increased the price target on Alphabet to $900 from $850 and sees a healthy 2016 on the expectation of moderating expense growth, according to a post on Barron’s.com.

Technical Review

Alphabet shares made an all-time high on December 29, 2015 at $798.69 before consolidation. Point and figure technicians met their bullish price objective of $794 and they now would target $874 if an uptrend resumed. (Chart courtesy of StockCharts.com)

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Summary

Alphabet expects to disclose Google results as a single segment and all other Alphabet businesses combined as “Other Bets” this quarter, so there could be some initial confusion. The company launched their first stock buyback since 2010 and insiders ramped up sales. Over the past four quarters, the average beat/miss is by 23c. Estimize consensus for a Non-GAAP EPS of $8.17 on revenue ex-TAC of $16.903 bln compares to analyst consensus for a Non-GAAP EPS of $8.10 on revenue ex-TAC of $16.866 bln. Paid clicks remain relatively strong, so any further strengthening would be a plus.

 

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