When Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) reports earnings on July 28, the Street is looking for $8.07 per share, but a recent note from Bernstein Research suggests those numbers are a tad too aggressive … but don’t start mauling GOOG and GOOGL stock just yet.
The bad news is that Bernstein believes GOOG would have to “see significant sequential acceleration” of revenue in Google Sites or deeply slash expenses to beat second-quarter earnings in a meaningful way: “Either (or both) is possible but we cannot find analytical basis to claim they are likely.”
What’s more, Google Sites revenue is expected to slow down to 20.4% year-over-year in the third quarter, well below the first quarter’s 26% year-over-year growth.
For the upcoming quarter, the firm expects neutral growth on an FX basis of just under 24% and 19.1% in reported revenue growth. Search revenue is expected to post 20.9% growth in Q2 (which is higher than the 17% posted in the year-ago quarter), but will drop to 17% in Q3 as the “mathematical certainty” demands Search growth slows.
The research firm also slashed Ebitda expectations to $8.3 billion, which is below the consensus for $8.39 billion. But it’s the earnings-per-share guidance that’s surely to ruffle the most feathers, with Bernstein now tracking per-share earnings for Q2 below consensus at $7.82.
And here’s the kicker: Bernstein believes the foreign exchange picture hasn’t fully come into view for the rest of the Street and expects 2016 estimates will begin dropping here in “the next couple of weeks.”
Ouch. But that doesn’t mean it’s all bad for GOOG stock investors.
The good news: Obviously, none of these lowered estimates are a certainty, which Bernstein points out by acknowledging the difficulty in predicting both Search and Sites revenue due to demand fluctuations, ad load increases and changes to Google’s algorithm that affect Search. And while Bernstein lowered its full-year guidance for this and the next year due to Brexit implications, the firm’s reduced targets of $87.6 billion and $103.2 billion for 2016 and 2017, respectively, remain ahead of consensus.
What’s more, it seems that currency headwinds have “masked” Alphabet’s strong growth in operating income:
“We believe that, on an FX-neutral basis, Alphabet’s operating income has grown significantly faster YoY than the reported operating income. We do not believe that this is a consensus view (see Exhibit 10). What’s more, we think that the gap between FX-neutral and reported operating income growth could close (see Exhibits 10 and 11), leading to a margin surprise in late 2016 and 2017.”
So, Alphabet Inc may not do so hot this quarter, but by no means does that mean the stock is through over the next few years. Bernstein still maintains its rating of “Outperform” and $900 price target.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
