Alphabet’s [GOOGL] share price has grown 12.3% for the year to date, closing at $1,503.65 on 28 July.
However, Alphabet’s share price wasn’t immune to the ravages of the March sell-off, causing it to plunge to a low of $1,054.13 on 23 March, before recovering 48.4% to a peak of $1,563.84 a week ago.
Since then, Alphabet’s share price has dropped off, falling 3.8% in the eight trading sessions to 28 July.
How will Alphabet’s share price react when it release its Q2 earnings report on 30 July?
Advertising headache spells trouble for Alphabet’s share price
In its first-quarter results, the Google parent company reported that revenues had beaten analysts’ forecasts growing from $36.3bn in the first quarter of 2019 to $41.2bn in Q1 2020.
However, in a silver lining for those invested in or trading Alphabet’s share price, the firm reported net income had dropped to $6.8bn from $8.3bn. Earnings per share came in at $9.87, down from $11.90 and missing the Zacks forecast by 5.1%.
Alphabet noted that Google ads contributed 82% of total revenues with Google Cloud seeing a 52% hike in sales and revenue from YouTube adverts up 33.5%. Its Other Bets division, reported to include AI-focused Deep Mind and anti-ageing researcher Calico recorded a 20.6% hike in losses to $135m.
of Alphabet's total revenue from Google ads
Alphabet’s Zoom rival, Google Meet, performed strongly as students and workers were locked down at home and looked for alternative means of learning and communication. Sundar Pichai, CEO of Alphabet and Google, highlighted that the company had passed a “significant milestone” of three million new users daily — “a thirty-fold increase in usage since January”.
As for the broader impact of the coronavirus pandemic, the group said that search usage was significantly higher as people looked for information on the virus. But advertising revenue in March hit the company. This could drag on into the second quarter.
“We anticipate that the second quarter will be a difficult one for our advertising business,” said Ruth Porat, CFO at Alphabet and Google said in the Q1 earnings call.
“We anticipate that the second quarter will be a difficult one for our advertising business” - Ruth Porat, CFO at Alphabet
According to Zacks Alphabet could report earnings of $8.43 per share — a 40.68% year-over-year decline. It expects Alphabet’s net sales of to decline by 3.3% to $30.66bn.
Despite advertising headaches, Zacks believes the group will have benefited from more business for its cloud service and a boost to YouTube subscription revenues on the back of those looking to stay entertained at home.
Analysts cautiously confident
Needham analyst Laura Martin has a buy rating with a $1,800 share price target. However, she expects Google’s full-year revenues to fall 7% year-over-year primarily down to the advertising hit, according to Smarter Analyst.
“We lower our earnings estimates owing primarily to weak ad categories including travel, entertainment, media, and retail,” Martin said.
Last week, Mizuho analyst James Lee recently upped its target from $1,650 to $1,750, according to Barron’s. Although ad spend has decelerated during the second quarter, Lee believes that returning consumer demand has spurred a “good recovery”.
Alphabet could also hoover up more television advertising revenues as people increasingly watch streamed media on YouTube.
“Television ad spend accounted for over $70bn in the US last year. With more consumers watching streaming media on services such as YouTube, Alphabet is poised to capture some of that television budget as it shifts to digital outlets,” Robert Izquierdo wrote in The Motley Fool. He thinks that longer-term, as advertising returns, “Alphabet’s potion with strengthen”.
“Television ad spend accounted for over $70bn in the US last year. With more consumers watching streaming media on services such as YouTube, Alphabet is poised to capture some of that television budget as it shifts to digital outlets” - Robert Izquierdo
Advertising may spell weakness spell for Alphabet, but the company’s growth levers and brand power should help it keep rising.
The consensus rating among 45 analysts polled by Market Screener is to buy Alphabet’s share price, a rating held by 29 analysts. The average target price of $1,604.74 would represent a 6.7% uptick on 28 July’s closing price.
|PE ratio (TTM)||30.73|
|Quarterly Revenue Growth (YoY)||13.3%|
Alphabet share price vitals, Yahoo Finance, 30 July 2020