While the correction has taken a toll on Alphabet Inc (GOOG, GOOGL), the damage hasn’t been too bad. Keep in mind that its return for the year is about -3.8%.
Then again, this has come off a particularly strong performance, where Google stock has gained about 40% during the last 12 months.
But with the earnings announcement coming on Monday after the market closes, is it a good time to take a position? Or should investors wait on Google stock?
Expected Alphabet Earnings
Well, to see, let’s first look at what the Street is forecasting for the quarter for Alphabet earnings. Basically, the consensus is for profits of $8.09 per share and revenues of $20.8 billion, up about 43% on a year-over-year basis.
It’s a good bet that investors will want a strong beat, as the overall market is still fairly jittery. Just look at the drops of stocks like Netflix, Inc. (NFLX) and Apple Inc. (AAPL) on their own earnings.
The good news is that Alphabet earnings have shown tremendous momentum during the past two quarters, which have involved impressive blowouts. And this should not be a surprise. The fact is that GOOGL has a tremendous platform that is benefiting from the megatrends of mobile and video.
In fact, the company has six properties that count over 1 billion users. So when advertisers are looking for options for their budgets, GOOGL is often a must-have.
At the same time, GOOGL has been more focused on cost cutting lately. A big part of this is from the company’s new CFO, Ruth Porat. And yes, she has a good sense of what Wall Street wants to see, as her prior stint was as the CFO at Morgan Stanley (MS).
Of course, a big part of the cost-cutting has been with the reorganization of GOOGL. To this end, there are now eight divisions, such as the core Google business (which includes search, YouTube, Android and apps) as well as the “moonshot” operations like Google X (Google Glass and self-driving cars).
By doing this, managers should be held more accountable for their performance. But at the same time, Wall Street will get much-improved transparency.
Keep in mind that the upcoming Alphabet earnings report will be the first time the financials will include the eight divisions.
No doubt, the bulk of the revenues is likely to be from the core Google advertising business. Interestingly enough, there has already been a hint of this from a recent disclosure from the company’s patent case with Oracle Corporation (ORCL). Some confidential documents were released, showing that Android has produced $22 billion in profits since 2008 and that GOOGL pays Apple $1 billion to be the default search platform of the Safari browser on the iPhone.
Bottom Line on Google Stock
The blowout earnings report from Facebook Inc (FB) should be a good sign for GOOGL. After all, both companies have dominant platforms for mobile and video. And for the most part, there are no signs that the growth of these megatrends will slow down anytime soon. If anything, GOOGL may see some acceleration, since the company has recently implemented new monetization features, such as install ads (GOOGL gets a fee when a user downloads an app) for Google Play and the introduction of new ad formats.
Besides, Google stock is at a reasonable valuation, with the forward price-to-earnings ratio at about 22. By comparison, Facebook’s is at 27X and Twitter Inc (TWTR) trades at a multiple of 31.
So in a way, Google stock looks like a bit of a value play right now. Although, buying ahead of the earnings report can still be dicey. Even a slight miss could mean heavy selling.
Thus, it may be worth waiting before taking a position in Google stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
