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Will Google-Parent Alphabet Top or Flop in Q4?

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Google-parent Alphabet Inc. (GOOGL - Free Report) is set to report fourth-quarter results later today. Alphabet’s earnings adjusted for one-time factors have significantly surpassed Wall Street’s expectations in all the three reported quarters of 2018. Thus, a good earnings result for the final quarter of 2018 should certainly impress investors, but, the task won’t be easy for the company’s management this time around.

Tougher Growth Trajectory

Alphabet has spent millions of dollars on marketing digital ads in the fourth quarter. Still, it was difficult for the tech giant to maintain revenue growth despite a healthy U.S. economy and steady rise in consumer outlays.

Rising costs to bring in more sales, in fact, have been haunting Alphabet for quite some time. Alphabet has invested a lot in building data centers to develop and market new consumer hardware like Pixel phones.

Alphabet’s sales from its own properties, including YouTube and search pages, have increased 22% and were lower than the 26% growth reported in the prior quarter. And if this downward trend continued in the fourth quarter, it will surely affect the company’s shares, which closed at $1,118.62 on Feb 1. Needless to say, the company’s stock is struggling due to the ongoing social media data hullabaloo and regulatory scrutiny across the sector.

The Bright Side

Alphabet’s sales and its outlook might improve on its success in the lucrative cloud computing market. Lest we forget, Alphabet’s ‘other revenue’ bucket that does include the cloud along with hardware and app sales, grew 29% during the third quarter. Alphabet now holds the third position in the cloud business, behind Amazon.com, Inc. (AMZN - Free Report) and Microsoft Corporation (MSFT - Free Report) .

Investors should see upbeat results from Alphabet’s other business lines, including the self-driving car unit. Waymo, a unit of Alphabet, had launched its first driverless-car service in Arizona last December and vowed to proceed “carefully” with the technology.

In the future, Waymo will “gradually roll out” the driverless car program and the early-rider program will continue. The early-rider program included more than 400 Phoenix-area residents signing up last year to test drive driverless cars in their neighborhood.

While Waymo, the self-driving business, may not have significantly boosted revenues in the fourth quarter, executives will certainly discuss its likely positive effects on the company’s earnings.


Will Alphabet be Able to Trounce Expectations Again?

Alphabet’s competitive advantage and growth in its cloud computing and driverless car segments should have a positive impact on its earnings. The Zacks Rank #3 (Hold) company is widely expected to report $11.08 of earnings per share for the fourth quarter, higher than $9.70 reported a year ago.

You can see the complete list of today’s Zacks #1 Rank stocks here.

 

The Zacks Consensus Estimate for its current fiscal year earnings has moved up 0.2% in the past 60 days.

 


But, for the company’s shares to gain traction in the near term, Alphabet needs to show that the new segments of growth such as cloud computing and driverless car are contributing more toward revenue than its ad business. The company has underperformed the broader industry so far this year (+7.0% vs +11.1%).

 


Nonetheless, its earnings growth for the current year is widely expected to come in at 31.1%, way higher than the Internet - Services industry’s projected growth of 0.7%.

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