My long-held skepticism toward Alphabet Inc (NASDAQ:GOOGL,GOOG) stock has proven correct over the last six months. Ahead of Alphabet earnings next week, GOOGL stock has been range-bound since November.
Of course, I also missed out on a nice run in GOOGL that lasted much of 2017. And I can see why the stock is rallying of late. $1,000 has proven to be support for GOOGL stock. Struggles at Tesla Inc (NASDAQ:TSLA) might bode well for Alphabet’s Waymo self-driving car unit. Google Cloud is growing nicely. And the core advertising business seems solid — for now.
Long term, however, I’m not completely sold on Alphabet’s prospects. I wrote earlier this month that there’s simply a lot of pressure on Alphabet on the moment, ranging from a litigation loss to Oracle Corporation (NYSE:ORCL) to regulatory concerns in both Europe and the U.S.
And in the near term, Alphabet earnings next Thursday could prove a speed bump for GOOGL stock. This looks like a key earnings season for the tech space as a whole — and Alphabet in particular. But if investor expectations are high, I see a reasonable chance those earnings could disappoint.
Concerns About Alphabet Earnings
The market as a whole has been much more volatile since the bull run ended in late January. And so I’ve agreed with the sentiment from CNBC’s Jim Cramer, and our own Hilary Kramer, that this earnings season is particularly important for the market. There are a number of external concerns troubling investors. Re-focusing investor attention on impressive earnings (in many cases with some help from tax reform) is one way for the market to resume its ascent.
GOOGL stock is a microcosm of that argument. There are a number of concerns, as I detailed back in February. But at ~20x 2019 EPS estimates backing out net cash, and expectations for 28% EPS growth this year, Alphabet earnings could remind the market of just how cheap GOOGL stock is.
But earnings season is off to a bit of a mixed start. Cramer himself called the first batch of reports — including “just okay” numbers from IBM (NYSE:IBM) — disappointing. Big bank reports on Friday and Monday barely moved those stocks. Always-reliable Netflix, Inc. (NASDAQ:NFLX) has soared post-earnings, but that aside investors have met growth with mostly shrugs.
Meanwhile, investors already are expecting pretty good numbers from Alphabet earnings. The Street projects 20%+ EPS growth on the back of a 22% increase in revenue. But Morgan Stanley (NYSE:MS) already has pulled down its price target, albeit modestly, arguing even those estimates might be a bit aggressive. And it’s not hard to imagine even a beat being shrugged off by the market — or investors instead focusing on the Alphabet earnings call, which will likely highlight many of the issues facing Alphabet stock.
The Long-Term Case for GOOGL Stock
To be sure, I’m not predicting a collapse in GOOGL stock next week, or recommending a GOOGL short. But it’s likely that Alphabet earnings will drive the narrative surrounding GOOGL for the next few months — and I’m not sure that’s a good thing.
For all the discussion about Waymo, Google Cloud and the company’s hardware efforts, this remains an advertising-based business. Increasingly, that business doesn’t look all that healthy.
Facebook stock admittedly has rallied of late, as investors believe the worst has passed. But I’m loath to believe that privacy concerns will be forgotten — or that Alphabet earnings won’t take a hit from them. At the least, the Q1 conference call will no doubt focus intently on Google’s data — possibly obscuring any beat in terms of fundamentals.
And if there’s any concern about the advertising business, the rest of Alphabet simply isn’t ready to pick up the slack. Google Cloud trails Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT). The hardware business adds little in direct incremental profits. (Obviously, it drives usage, which helps data collection and advertising revenue.) Waymo is years away from making a real contribution.
Those concerns don’t necessarily break the long-term case for GOOGL stock. But in the near term, it’s possible Alphabet earnings could have a perverse effect. Instead of focusing investors back to the numbers, it will again remind investors of the risks to the business. If that’s the case, GOOGL stock could be set up to stumble coming out of earnings.
As of this writing, Vince Martin has no positions in any securities mentioned.