Alphabet is scheduled to release its next earnings report on Thursday after closing bell, and analysts and investors alike are expecting something excellent. Alphabet stock surged by more than 2% during regular trading hours today as investors pushed it to a new record high of $876.63. The Google parent is one of those companies that has to go far above and beyond expectations in order to send its shares further up after earnings.
Alphabet earnings preview
In a note dated April 21, MKM Partners analyst Rob Sanderson reiterated his Buy rating and $1,000 price target on Alphabet stock. He noted that estimates have come down a bit, mostly because of problems with ad placement and the advertisers’ boycott of YouTube, even though most of the impact is likely to come in the second quarter rather than the first.
Alphabet has completed the move to GAAP earnings reporting, so Thursday’s release won’t contain any non-GAAP results. Sanderson warned that this could be a source of confusion leading up to and even in the hours after the release, depending on how much detail the company provides in terms of its segment reporting.
What about that YouTube boycott?
Sanderson believes the company could achieve or even beat consensus for Websites revenue growth, which suggests an 18.6% increase, marking a deceleration from the previous quarter’s 20.3%.
Since the big brands didn’t start to boycott Google and YouTube until the middle of March, he expects to see very little impact from the ad boycott in the first quarter and predicts a “modest drag” on Alphabet’s second quarter earnings results. The problem started in the U.K. where some advertisers started to boycott some of the company’s services because their ads were appearing alongside or within potentially offensive content. He notes that YouTube and Google Display Network are the most impacted by the boycott and estimates that about 25% of the company’s total revenue could see some impact, although advertisers didn’t reduce their search spending.
According to Sanderson, if related ad spend in the U.K. is reduced by 10%, it would amount to about $16 million to $17 million per month. He pegs the first quarter impact at around $50 million, or about 0.2% of his ad revenue estimate for the quarter.
Alphabet to show strong mobile results
In his earnings preview note dated April 24, Nomura Instinet analyst Anthony DiClemente highlighted strong mobile search trends for Google. He estimates a 19% increase for Websites revenue, adding that data from ad agencies show a greater-than 30% increase in mobile search. He also found evidence of strong Google Play Store revenue based on data from SensorTower which suggests an 87% year over year increase, marking an acceleration from the fourth quarter’s 77% increase.
DiClemente also reports that adoption of Google Cloud picked up during the first quarter, based on his firm’s March CIO survey. However, the survey also indicates that Google Cloud still trails Amazon Web Services and Microsoft Azure.
He reiterated his Buy rating and $925 price target on Alphabet stock based on what he sees as a “highly defensible competitive position,” paired with a “robust” trajectory in free cash flow and attractive valuation. He believes Google will remain the undisputed leader in search and expects ongoing gains in efficiency to boost free cash flow. Unlike others, apparently he’s not worried about Amazon taking a significant bite out of the company’s Product Listing Ad revenue.
