Growth stocks: Alphabet (Google)

The actions ofAlphabet (GOOG.US) were dragged down by the disappointing results of Snap (SNAP.US) July 21. Snap sent a shockwave through social media that affected all advertising-based technologies. But we won’t know if Alphabet has the same problems as SNAP until it gives us its report tonight after the closing bell on Wall Street.

The market estimates that second-quarter revenue will rise 14% year-on-year to $58.14 billion, while earnings will rise 6% to $1.39 per share. Gross margin is also expected to decline significantly in Q2 to 62.25% from 69.98% in Q2 2021, down -10.9% year-over-year.

Google Cloud revenue is expected to increase 36.9% to $6.3 billion, while YouTube ad revenue is expected to increase 7.9% to $7.55 billion.

Investors track an important metric for Alphabet: traffic acquisition costs (TAC) or what amounts to the same, the expenses incurred by the company to obtain quality and real traffic, on its pages, for a later monetization. Over the years, Google has been able to reduce its traffic acquisition costs and, in any case, keep it stable. It is estimated to have increased by 12.65% to $12.3 billion. If the company releases a higher than expected TAC, the market would view it negatively.

Analysts have adjusted their estimates of Google’s advertising revenue down from $58.3 billion recently. Even though revenue estimates have been lowered, they are still at the high end of the range as of mid-2021, indicating that analysts do not yet expect a significant slowdown in advertising activity. ‘Alphabet, setting a high bar for the company to overcome.

source: Bloomberg

Overall revenue and profit estimates haven’t been adjusted much either. So if there are any external pressures from weakening ad sales, at least for now, they’re not reflected in earnings or revenue estimates, which means Alphabet only has only one option: it must deliver this quarter and beat these high forecasts.

According to Bloomberg, as of July 17, 34 analysts have submitted their estimates for Google’s results. Total sales are estimated between $66.85 billion and $72.06 billion, with a median estimate of $69.95 billion. In particular, if we take the average as a target, sales should grow by 13.03% compared to the same quarter of 2021. While for earnings per share, the target is around 1.05 $ and $1.54, respectively, with an average of $1.29.

source: Seeking Alpha

Looking ahead to Alphabet’s second quarter results, sentiment is weak. For reference, since the start of 2022, analysts have consistently downgraded the company’s EPS estimates to reflect macroeconomic challenges and likely tougher competition for advertisers cutting ad budgets. As a result, Google shares are down about 22% year-to-date. As we can see in the picture above.

source: Bloomberg

Are Google stocks cheap or not?

Yet something is wrong with the stock right now, as it has fallen in step with the market and looks very cheap, trading at just 16.6x earnings estimates for the next twelve months and trading at the bottom of its range. historical. Even adjusted for its expected long-term growth rate, the PEG ratio is only 0.70x, well below 1x, while the price-to-sales ratio is around 5.5x. Both are at the bottom of their historical range and look cheap.

This gives investors two options: either the stock is incredibly cheap, or the market fears that future earnings and earnings forecasts are too high and need to be adjusted lower. Even the recent split in its shares from 20 to 1 has not been a significant boost, despite the fact that liquidity and trading have increased significantly.

For reference, the results of the second quarter of Netflix (NFLX.US) weren’t spectacular. In fact, given the company’s track record of strong growth, an 8.6% increase in depressed earnings estimates is arguably positive. However, the sentiment around Netflix and the streaming industry was so depressed that the stock appreciated more than 15% in 5 days when the results were simply less bad than the market expected.

source: Bloomberg

Technical view

Investors therefore fear that the company will publish disappointing results on Tuesday or consider the growth forecasts too high. Alphabet’s technical side is very weak, with a long-term bearish trend in its relative strength index (RSI). Additionally, shares have been consolidating sideways since early May, between $100 and $120. This sideways consolidation formed after the stock suffered a significant decline. This creates what appears to be a technical pattern known as a descending flag that could cause the stock to drop significantly. Where the support level to watch on the downside would be $100. If this level were to be lost, the decline could extend to $90.

source: xStation

Alphabet has seen fantastic growth in recent years and has a bright long-term future, given its dominance as a search engine as well as in advertising and its growing dominance in streaming services. However, this does not mean that the company is not prone to problems from time to time. The stock may be entering one of those tough times right now.

Looking ahead to Google’s second quarter results, sentiment is weak. For reference, since the start of 2022, analysts have consistently downgraded the company’s EPS estimates to reflect macroeconomic challenges and likely tougher competition for advertisers cutting ad budgets. As a result, Google shares are down about 22% year-to-date.

On the other hand, Google announced a $70 billion share buyback program in the first quarter of 2022. This represents 5% of the company’s total market cap. On April 20, 2022, Alphabet’s board of directors authorized the company to repurchase up to an additional $70 billion of its Class A and Class C shares in a manner deemed to be in the best interests of the company and of its shareholders, taking into account economic cost and prevailing market conditions, including relative prices and trading volumes of Class A and Class C Shares.

Recall that in the first quarter of 2022, Google still had more than $134 billion of cash and cash equivalents on the balance sheet and that the company will likely take advantage of the decline in the share price to buy back many more shares at the future. While there’s no downside to the company expanding the program in the future, there’s a compelling upside if Google does. In any event, a 5% share buyback program should provide significant support for the company’s valuation.

Risks and Conclusions

When it comes to results, there are two main risks: Firstthere is, of course, the possibility that Snap’s results are not isolated, but rather a guide to the entire digital advertising space. Secondlyit could be that even if Google exceeds expectations, the market remains worried about the company’s performance in the second half of 2022. In this case, investors would probably look to take advantage of the current price and sell now that the results are in. .

That said, Google’s predictions will be important. But the converse also needs to be considered: despite Google’s weak earnings offering, investors will take the opportunity to buy the stock price pessimism simply because it’s about Google.

Google shares are trading at a 12-month P/E of around 19.5x. That’s too low for a high-growth FAAMNG stock like Alphabet (Google).

Dario Garcia, EFA
XTB Spain

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