There’s a good chance that Alphabet Inc (NASDAQ:GOOGL) second-quarter earnings report, due out Monday evening, will push shares back toward the four-digit mark, if history is any indication. Alphabet’s earnings reports traditionally have been pretty good to GOOGL stock, and with shares at $994, it would take less than a 1% move to breach psychological resistance once more.
In fact, while I remain rather bearish on GOOGL stock longer-term, I’d expect shares to challenge their all-time high of $1,008, set back in early June, shortly after tonight’s Q2 report.
After all, it was the optimism coming out of Alphabet earnings for Q1 in April — when GOOGL gapped up on a monster earnings beat — that set the stage for the first run to $1,000-plus. Expectations for Q2 aren’t high: analysts are expecting a decline in GAAP EPS on 19.3% revenue growth, below the 22% generated last quarter.
Short-term price movements aside, there will be a lot to look for in the Alphabet earnings report. Cost per click (CPC) rates in the legacy advertising business continue to decline. A change in that trend could be a big part of the post-earnings narrative. Meanwhile, the company’s “Other Bets” division of high-risk, high-reward opportunities will have had another quarter to show promise … or create concern.
All told, Alphabet earnings generally don’t move GOOGL stock all that much, but they do shape the narrative around the stock for the weeks after.
The second-quarter report seems likely to do the same.
Alphabet Earnings Driven by the Legacy Business
For all the discussion about some of Alphabet’s growth projects, advertising still drives the profits. In fact, 88% of 2016 revenue — and likely more than 100% of earnings — came from the legacy Google business.
Just a couple of years ago, that reliance was a cause for concern relative to GOOGL stock. Many investors saw the company’s profit growth eventually leveling out as that market became saturated. But Google and rival Facebook Inc (NASDAQ:FB) now drive an estimated 99% of growth in the U.S. market, which has allowed Alphabet Inc to offset margin pressure from declining CPC rates.
CPC concerns still exist, however. In Q1, paid clicks rose 2% – but the price paid declined 4%. If those rates finally stabilize, there’s room for real upside to GOOGL stock. It would cement a dual-engine bull case: tons of free cash flow from the advertising business, and impressive potential growth from the “Other Bets” like self-driving unit Waymo and thermostat maker Nest.
Such a stabilization seems unlikely in Q2. But even avoiding further margin compression should be enough to keep the current bull case intact.
Other Bets
The one area that might be of concern in Alphabet earnings is in its “Other Bets” division. Google is trying to diversify away from its reliance on advertising by chasing a series of growth initiatives in a number of high-tech areas. Those initiatives are losing money — almost $900 million in Q1 alone — but for now, investors are being patient.
But Alphabet earnings need to show some progress in some of the key businesses. Diversifying away from a central cash cow is harder than it looks — as Microsoft Corporation (NASDAQ:MSFT) has learned over the past two decades. Without some good news, investors may start to become a bit more skeptical of what the company itself has in the past termed “moonshots.”
InvestorPlace contributor Brian Wu argued last month that estimated valuations for Waymo were getting a little ridiculous
, and I agree. Competition from everyone to Tesla Inc (NASDAQ:TSLA) to legacy manufacturers like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) and even Apple Inc. (NASDAQ:AAPL) will only intensify. Outside projections suggest that Google Home is falling behind rival Echo from Amazon.com, Inc. (NASDAQ:AMZN). Google Fiber appears to have been a miss.
The Google Pixel looks like an early winner, and strong data there could help the stock. But steadily increasing expectations mean there likely has to be some good news beyond advertising — and Pixel may not be enough.
Bottom Line on GOOGL Stock
I wrote just a few weeks ago that I thought it would take Alphabet shares quite a while to hit $1,000. A strong July has proven me wrong on that point. And the nature of Big Tech’s earnings reports the past few quarters means that I’d probably bet on the company once again beating expectations, as it’s done regularly the past few years.
But while GOOGL stock might again reach $1,000 per share, I’m still skeptical that it’s actually worth $1,000 per share. Q2 earnings should give more evidence as to whether I and other Alphabet bears will be proven wrong on that front, too.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
