Alphabet Inc (NASDAQ:GOOGL) stock is losing momentum earnings ahead of Q3 earnings.
The parent company of online search giant Google, Alphabet Inc (NASDAQ:GOOGL), is scheduled to report its third quarter earnings results on Thursday, 26th October. Alphabet stock has remained under pressure since the last quarter earnings only to make a slight recovery recently. The company had delivered a beat on both the top and bottom line in Q2, yet the Mountainview, California-based company shares tanked after the earnings. The tech behemoth had reported $5.01 per share in EPS against analysts expectation of an EPS of $4.49. Alphabet revenues were also above estimates by a big margin of $410 million at $26.01 billion, translating into yet another quarter of double-digit revenue growth. Google stock has still not made a complete recovery. GOOGL stock is almost flat since the last quarter earnings.
Falling Operating Margin and Rising TAC hurt Google stock.
The main reason for the Alphabet shares tanking even after a strong beat on both EPS and revenue estimates was the steep fall in operating margins and rising Traffic Acquisition Costs (TAC). The operating margin fell sharply to 16% from 28% previously. However, the majority of the decline was due to the European Commission fine incurred in this year's Q2. Still, investors did not take the shrinking margins kindly. Further, the rise in TAC to 22% of advertising revenue from 21% in the year-ago period, did not give a positive message. Google's costs and margins were impacted due to shifting to mobile search where profitability is lower. The increased TAC bothered investors too much, as investors were under the impression that the industry was maturing with few other growth prospects. The TAC and operating margin will be again closely watched in the latest earnings.
Alphabet Earnings - Q3 Analyst Estimates
Analysts expect Alphabet to report $27.2 billion in revenue for the quarter, translating to a Year-on-Year (YoY) growth of 21.2%. Given Google's massive revenue base, a growth rate of more than 20% YoY is actually great. On the earnings front, analysts expect the search giant to report an Earnings Per Share (EPS) of $8.33, translating to an 8.05% YoY decline in earnings. While the bottom line is under pressure, analysts continued to see strong top line growth. SunTrust Robinson Humphrey’s Youssef Squali based on his recent calls with marketing software firm Kenshoo suggests that there have been very positive growth trends in social ad spending in for the third quarter which is a big positive for the likes of Google and Facebook (NASDAQ:FB). For now, Alphabet revenues are likely to see a healthy growth.
Cloud and Other bet segments will also be under focus.
In the second quarter, Google's Other revenues which include Play, Cloud and hardware revenues also saw an impressive 42% YoY growth, to come in at $3.1 billion. With so much focus on the company's Cloud business in recent times, investors would also be keenly watching the Google's Other revenues in the latest earnings. One major positive in the second quarter was the overall improvement in Alphabet's moonshot segment 'Other Bets' business. The Other Bets revenue increased to $248 million from $185 million in the year ago quarter. At the same time, the Other Bets operating loss narrowed to $772 million from $885 million in the previous year. Any major progress in the Other Bets segment could come as big positive for GOOGL stock and could, in turn, drive it higher.
Playing Google stock ahead of Q3 earnings.
The Wall Street continues to remain bullish on Alphabet stock in the long-term, given the strong revenue growth and dominant position in the digital advertising business. The average analysts' price target on GOOGL stock is $1,104.92, more than 12% upside from its last close. According to Yahoo Finance data, of the 43 analysts tracking Google stock, only one has a sell rating on it. However, a word of caution for Alphabet bulls, the Google stock technical chart is flashing some bearish signals ahead of the earnings. Google stock closed below its 20-day moving average in a bearish move. Further, GOOGL stock technical chart yesterday also saw a bearish crossover from the Moving Average Convergence Divergence (MACD) indicator, which is a popular momentum indicator used by technical traders. In a bearish MACD crossover, the MACD line cut the signal line from above and went below it. The technical set up suggests Google stock might come under pressure. Long-term investors are better off to make the most of any weakness in Alphabet stock to accumulate more shares.
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