Will Alphabet Earnings Q3 2015 Spring A Surprise?

  • Analysts are expecting big things from Chief Financial Officer Ruth Porat, and whispering of earnings at $6.74/share.
  • The stock has already jumped $100/share on financial discipline and creation of the Alphabet holding company.
  • There is also a halo around new Google head Sundar Pichai, who must get more from Android and YouTube.

The “whisper number” for Alphabet Inc-A (NASDAQ:GOOGL) earnings tomorrow is $6.74/share.  That is 14 cents per share higher than the official analyst estimate of $6.60, but well above the average “whisper number” of the last four quarters, which was $5.80/share.

If Alphabet earnings were to hit the $6.60 mark for four straight quarters, the Price/Earnings multiple would be 25, not the 32 it currently sits at. And that is what Alphabet bulls are expecting.

But that’s not the story. That’s not why the shares are holding the levels of three months ago, or why analysts are rubbing their hands in anticipation.

What they are expecting is more from the “Porat Effect,” the inventiveness of new Chief Financial Officer, and former Morgan Stanley (NYSE:MS) executive, Ruth Porat. Google was a great business, but financially it was being run as a mom-and-pop shop. Porat is going to bring it, as Alphabet, into the 21st century.

Porat has already extracted some of the futuristic pieces of the company – the wearables, the cars, etc. – in creating the Alphabet holding company. This gives investors more visibility into what the search engine is doing and what the other operations are costing. The announcement of Alphabet, and the last quarter’s earnings, caused a $100/share shift in the stock’s trading range – from around $550/share to around $650.

Now many analysts are pounding the table for the stock, expecting more financial discipline, a firmer hand on costs, and (dare we say it) a return of capital to shareholders, in the form of share buybacks or even dividends. Wells Fargo (NYSE:WFC) analysts now have a $800/share price target on the stock, a sharp gain over its current price. (A stock split would also be seen as a positive.)

Beyond expecting more out of Porat, investors are also expecting more from new Google head Sundar Pichai. The main search engine has been challenged by the move to mobile, and 75% of its $11.8 billion in mobile search revenue comes from Apple (NASDAQ:AAPL) devices. Apple thus has some power over Google, which Pichai needs to counter by getting more revenue out of the Android operating system, which leads in market share but trails significantly in monetization.

Analysts also expect Pichai to monetize more than just the Google search engine. This would mean more earnings from YouTube, which is now moving towards creation of an ad-free subscription service and signing up media partners. It would mean getting more out of Google Docs, the application suite that has lately been losing ground to Microsoft (NASDAQ:MSFT) Office 365.

For now, however, there remains a halo around Porat and Pichai, an assumption that they will get things right for the company and for shareholders. If Alphabet earnings Q3 2015 fall below $6/share, however, expect those halos to be removed quickly.

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