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Google Earnings Preview: Eyes On The Pixel

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Google parent Alphabet is scheduled to release its next earnings report on Thursday after closing bell. The Street is looking for $20.6 billion in net revenue and non-GAAP earnings of $9.63 per share. Sentiment on Google has been quite positive since the beginning of the year as the company continues to grow on the back of mobile, YouTube and hopefully, the new Pixel phone line.

Is there promise in the Pixel?

Deutsche Bank analyst Lloyd Walmsley raised his price target for Alphabet stock from $1,080 to $1,090 per share in an earnings preview report dated Jan. 25. He also reiterated his Buy rating on it.

Although he believes that for now, the Pixel business is mostly profit neutral, he expects it to “scale into higher margins.” His base case keeps Pixel units below 10 million through next year, but he feels that the risk/ reward related to the Pixel is skewed, as it could change the Google narrative if the company “unleashes its hardware business and becomes a play on Virtual Assistants and AI.” He estimates that every percentage point of smartphone share is worth $20 per share in Alphabet stock, and he bumped up his revenue estimates for the Pixel, although currency headwinds in the ad business and investments offset that increase.

How many Pixel units?

Walmsley pegs the number of Pixel units at 1.5 million in the fourth quarter and 7 million for all of this year. He called the phone “a reference design showcasing Google’s Virtual Assistant.” Although reception has been strong, he said unit upside is capped by supply constraints and order commitments.

JPMorgan analyst Doug Anmuth is estimating a lot more Pixel units in the fourth quarter, as he projects 2.5 million. He acknowledges that this estimate is probably toward the high end of expectations, but he adds that the higher Pixel unit number drives his net revenue estimate for Alphabet above consensus to $21.6 billion.

The analyst is expecting a 21.5% growth rate in FXHN Google Sites Gross revenue and 26.5% FXHN overall gross revenue growth. He reports that SEM checks have been mostly positive as Merkle showed a 9% year over year increase in search spend and Kenshoo showed a 17% increase, the former of which is a slight deceleration from the third quarter and the latter of which is a sequential acceleration.

Class A shares of Alphabet stock edged upward by as much as 0.83% to $856.54 during regular trading hours on Wednesday.

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