Any time a public company reports quarterly earnings, EPS and revenue are going to grab the headlines. In that respect, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) got some great headlines this week when Google reported earnings and revenue beats. However, a closer look at Google’s quarter reveals the company’s performance may have been even better than it seemed, leaving Google stock poised for another push up.
Following the Google earnings report, Bank of America analyst Justin Post discussed his “big four” key metrics for GOOGL stock. First, Alphabet reported 19% overall revenue growth on the quarter. However, Post said core Google Website revenue growth was perhaps more important for Google stock sentiment.
Google Website revenue was up 20% from a year ago. That growth rate was also up 1.4% compared to the first quarter after adjusting for foreign exchange and hedging. Post said mobile search and YouTube’s contributions to core revenue were particularly noteworthy.
A Closer Look at Google Stock
Core Google margins have been another cause for concern in recent quarters due to rising costs. This quarter, margins once again compressed 1.4% compared to a year ago. The good news is that contraction is much less than the 2.6% contraction Post was expecting. In fact, core Google margins were actually up 0.65% compared to the first quarter.
The next under-the-radar GOOGL stock sentiment driver is Google Cloud commentary. Alphabet doesn’t explicitly provide numbers for Google Cloud in its earnings report. However, CEO Sundar Pichai said on Alphabet’s earnings call that Google Cloud has reached an annual revenue run rate of $8 billion.
That’s a big improvement over the $1 billion annual run rate Alphabet reported back in February 2018. Post estimates could revenue was up about 70% from a year ago.
Finally, after buying back $6.6 billion of Google stock in the first half of 2019, Alphabet has authorized another $25 billion buyback plan. Some critics are already calling the new buyback plan too conservative. Post says the new buyback authorization is “substantial” and could help offset offset dilution and boost EPS.
GOOGL Stock Worries Overblown
Google is a global leader in high-growth tech fields like internet and mobile search, online advertising, artificial intelligence, cloud services, machine learning and autonomous vehicles. Despite its massive $800 billion market cap, it’s still growing revenue at nearly a 20% clip. Amazon (NASDAQ:AMZN) is trading at a forward earnings multiple of 51.4. Facebook (NASDAQ:FB) has a price-to-sales ratio of 9.8. GOOGL stock trades at a P/S of 5.6 and a forward PE of just 21.2.
Concerns over data regulation and antitrust uncertainty are two of the reasons Alphabet stock isn’t trading at a market premium. However, Wedbush recently said, “a broad movement to break up companies solely because they are large will fail without a change to existing antitrust laws.”
Fortunately for GOOGL stock investors, that change in the law would require Congress to agree on a new law. In 2019, realistic investors know Congress agreeing on anything important is extremely unlikely.
On the data regulation front, last year’s new regulations in Europe haven’t put much of a dent in Google’s business. A $57 million fine in January was hardly a concern for Alphabet. The company reported $9.18 billion in net income in Q2.
At the end of the day, Post says there are simply too many bullish long-term GOOGL stock catalysts for investors to ignore.
“We continue to be optimistic on medium-term benefit from machine learning on usage and ad targeting, revenue potential driven by new opportunities (Google Cloud and Waymo), and relatively undemanding core Google valuation,” Post said.
Bank of America has a “buy” rating and $1,450 price target for GOOGL stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
