Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is one of the largest, most widely followed companies in the market. Alphabet stock investors have enjoyed its strong move up so far in 2019. But will this all change after GOOGL reports earnings? The company is expected to report on April 29, after the market close.
Now that the earnings season is here, let’s look at what may be next for GOOGL stock, which has been a darling of Wall Street since its IPO in 2004.
Strong Revenue Growth
Google’s dominant core business is “search,” where it has 90% market share globally. In recent years, it has also been incubating other “moonshot” ventures, such as Weymo, the self-driving car business or CapitalG, the late-stage venture capital arm, that could eventually become the next Google.
When GOOGL reports earnings, investors will look at its revenue in three segments:
- Advertising (which mostly consists of its search and YouTube ecosystem and contributes over 80% of revenues)
- Google “Other” (which mostly consists of its Cloud Platform (GCP) and app sales and contributes about 15% of revenues)
- Other Bets (which consists of ventures such as Weymo and contributes about 5% of revenues)
In 2018, the company made $137 billion in revenue. The tech giant is estimated to have a 37% digital advertising market share in the U.S. Its closest competitor Facebook (NASDAQ:FB) has about 20% of the market.
Going forward, although Google’s digital advertising revenues are likely to continue to be the main revenue driver, its cloud business is the growth area to watch for. The cloud computing market is estimated to surpass $600 billion by 2023. Behind Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), Google is estimated to be the third-largest cloud computing provider. Finally, for most long-term investors, the “Other Bets” category would be like a lottery ticket windfall.
Another long-term play for Alphabet stock is likely to be Stadia, GOOGL’s recently announced cloud gaming service. The company has not yet provided details about the business model. However, the tech giant is expected to get a share of the $180 billion industry.
In short, Google dominates the search market, excluding China where domestic rival Baidu (NASDAQ:BIDU) dominates the scene. Alphabet is also expected to continue its dominance in the digital advertising market, and over the next five years, have an annual average earnings growth of almost 18%.
Finally, investors have always been ready to give a premium to GOOGL stock due to its free cash flow (FCF), which measures a company’s ability to produce cash. Google ended 2018 with a free cash flow of over $21 billion. Investors care a lot about FCF as it can be used in a discretionary manner, for example, to invest in growth opportunities and to strengthen GOOGL’s balance sheet.
What Could Derail Alphabet Stock?
On Feb. 4, when Google came out with Q4 2018 earnings, it raised a few eyebrows as the company revealed declining advertising prices and rising costs. Investors are especially concerned that the group’s core advertising business is likely to be at a plateau. They are now watching Amazon’s increased presence in the market closely.
In 2018, Google’s ad business grew 20% and was outpaced by both Facebook at 30% and Amazon at 95%. In other words, GOOGL is likely to face more competition in the future from Amazon, Facebook, Baidu and several other competitors. But it would be premature to assume that the tech giant is slowing down in a manner that should alarm long-term investors.
The group also reported an operating margin of 21% for Q4 2018, lower than the 22% expected by analysts. Following the earnings report, the stock initially sold off, but only to recover in the following weeks. In other words, if Google investors do not like the earnings result of April 29, there might be a similar price pressure and reaction to the downside.
Because of the recent impressive run-up in the price of Alphabet stock, short-term technical indicators have become somewhat over-extended. Investors who pay attention to short-term oscillators should note that Google’s technical message has also become “overbought.”
In the next two weeks, GOOGL stock could trade sideways and even have a pullback toward the $1,180 level or even the $1,170 level, where the stock is likely to find major support.
Google stock’s beta is 1.06, which means its volatility on average mimics that of the broader market. Therefore, if other big tech names or the broader market declines as the companies release earnings, the GOOGL stock price may also be adversely affected.
I would not advocate bottom-picking in case of near-term price weakness, especially after the earnings release. Yet, I find GOOGL stock to be a compelling buy candidate and by the end of 2020, I’d expect the shares to reach $1,350.
The Bottom Line on GOOGL Stock
Alphabet’s first-quarter earnings release will give Wall Street a chance to analyze the company’s latest results and assess whether the stock’s recent run-up in price can continue the rest of the year.
Investors who are interested in the GOOGL stock but do not want to commit all their capital to a single stock may also consider investing in various exchange-traded funds (ETFs) that have Google as a holding. Examples of such funds include the iShares U.S. Technology ETF (NYSEARCA:IYW), the Technology Select Sector SPDR (NYSEARCA:XLK) or the AdvisorShares New Tech and Media ETF (NYSEARCA:FNG).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
