Analysts and investors worldwide will be watching with bated breath as Google’s parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) releases its second-quarter earnings results on Thursday, July 25. On the heels of a challenging June — including a nerve-wracking 6.3% drop on the third day of that month — Google stock could take a sizable hit if the upcoming earnings figures don’t match analysts’ expectations.
Jittery investors survived an 11% decline in the Alphabet stock price since late April, and the last thing they need now is an earnings miss.
Is there reason to believe that GOOGL stock can stage a turnaround — or at least survive — in the coming week?
Antitrust Concerns Already Priced into GOOGL Stock
About that single-day 6.3% decline I mentioned … We definitely need to address that. The decline happened after The Wall Street Journal reported that the U.S. Department of Justice was preparing to launch an antitrust investigation against Alphabet. Understandably, Google shareholders have expressed concern that fines and increased regulatory oversight could be afoot.
As a contrarian investor, I see this as a reason to accumulate GOOGL shares, not dump them. Alphabet has already survived three separate antitrust-driven multi-billion-dollar fines in Europe: a $2.7 billion fine in 2017 over Google’s comparison-shopping service, a $5 billion penalty in 2018 concerning its mobile-search products, and a $1.7 billion fine in early 2019 for alleged offenses by Google’s AdSense for Search business.
Alphabet easily absorbed all of these fines (that’s what they call “operating expenses”) while still generating billions in net income. They have proven time and again that antitrust suits won’t dent their armor and that Alphabet can withstand regulatory scrutiny while continuing to provide undiminished shareholder value over the long term.
Strong Revenues Should Buoy Google Stock
If the first quarter was any indication, Alphabet’s revenues ought to instill plenty of confidence in GOOGL shareholders. As Alphabet Chief Financial Officer Ruth Porat stated during the company’s Q1 report, multiple sources have provided Alphabet with consistent cash flow:
We delivered robust growth led by mobile search, YouTube, and Cloud with Alphabet revenues of $36.3 billion, up 17% versus last year, or 19% on a constant currency basis. We remain focused on, and excited by, the significant growth opportunities across our businesses.
In addition, ad revenue from Google’s own properties increased by 16.7% during that quarter to $25.68 billion. Sales generated by the company’s network members’ sites were up 8.5% to $5.04 billion in Q1. As far as I’m concerned, the doubters might have sentiment on their side but they certainly don’t have the numbers to back up their pessimism.
Huawei Issues in the Rearview Mirror
Everybody knows about the negative impact that the U.S. Commerce Department Bureau of Industry and Security ‘s “Entity List” Huawei ban had on the domestic tech sector. In the weeks following the blacklist designation, smartphone sales fell by more than 40% in some markets, and Google was unable to provide their Android Operating System to new Huawei phones.
If you believe that markets are efficient, then you’ll understand that this obstacle will already have been priced into Google stock and will lower analysts’ second-quarter expectations considerably.
In any case, Google has just applied for an export license with the U.S. Department of Commerce so that it can source its Android OS to Huawei again; Kevin Ho, the president of Huawei’s handsets business, said he expects that Google’s waiver will be granted, enabling the use of the Android OS on new Huawei phones later this year.
The Bottom Line on Alphabet Stock
Even if Google’s results aren’t stellar, they should at least outdo people’s expectations. That’s the key to an earnings beat, after all: you don’t have to be great — just be good enough, and that’s usually good enough.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.