Alphabet - what to expect from the Q3 earnings? 📌

This week's focus is on Big Tech's quarterly results. In particular, investors' attention will be focused on the so-called “Mag-7,” which include: Amazon, Alphabet, Apple, Tesla, Nvidia, Microsoft and Meta. The earnings season for these companies kicked off with Tesla last week reporting results well above expectations. This added additional pressure ahead of the results of the other companies. Today, after the close of trading, Alphabet will show its results, which could be an even more important preview of how the other companies will perform, due to the overlap of sectors, i.e. the cloud segment for Alphabet, Amazon and Microsoft.

It's worth noting that in previous quarters, Microsoft's performance was a strong counterweight to Alphabet's, and worse revenue growth in the cloud segment from rival Azure caused downward pressure on Google's parent company's stock price. This has changed since last quarter due to the failure to publish results on the same day. Thus, the pressure on Alphabet's shares should be somewhat less this time as well, and if strong results are proven, it can be expected that market reaction will not be constrained by data from other companies.

AI continues to be a key segment

For Alphabet, one of the key figures for investors continues to be the situation in the cloud segment. For Google Cloud revenues, consensus expects growth to increase to 28% y/y, which would mean 6 p.p. higher revenue growth than a year earlier. This growth rate is driven by the increasing popularity of the use of artificial intelligence solutions, and in the case of both Alphabet and rival Amazon and Microsoft, it is the cloud segments that indicate the pace of positive impact of demand for AI-related services on the companies' results. Hence, the segment's performance will continue to be heavily watched by investors.

For Alphabet, however, AI may prove to be a double-edged sword. Its most important segment remains advertising revenue related to the Google Search segment. Google (Alphabet's subsidiary) remains the clear leader in the search engine market, but the recent rapid development of generative artificial intelligence may weaken this position. Given the segment's high share of both revenue and the company's overall operating profit, any blemish on the segment's stable dynamics could be viewed extremely negatively by investors. A similar mechanism also applies to advertising revenue segments, in particular YouTube, whose slower growth rate in the previous quarter caused a strong market reaction and, as a result, a discount after the company's results.

DOJ decision a big unknown

Among the non-financial data, investors will primarily be paying attention to possible information regarding possible predictions of a pending lawsuit against Google's position in the search engine market. One of the risks concerning the company's operations may be the need to separate Alphabet's companies in order to reduce the risk of monopolizing the market. Although such a decision would be a decidedly negative sign for the company itself, so looking at the valuation of the separated companies using the Sum of the Parts method, the company's current listing represents a slight discount to this value.

Raised forecasts ahead of results

Market consensus expects the company to maintain strong momentum in both revenue and operating performance. Over the past four weeks, consensus forecasts for Alphabet's key financial figures have gone up. The market now expects the company to deliver $1.97 adjusted earnings per share in 3Q24 (up 1.35% from last month's forecasts and +27% year-on-year growth)

Alphabet's 3Q24 earnings forecasts. Revenues of $72.88 billion are adjusted for customer acquisition costs through, among other things, payments to the company's partners (ex. TAC). Source: Bloomberg Finance L.P.

3Q24 EARNINGS FORECAST:

• Estimated revenues: $86.44 billion (+13% y/y)
• • Google services revenue $75.24 billion (+11% y/y)
• • Google advertising revenue: $65.5 billion (+10% y/y)
• • Google Search revenue $49.08 billion (+11% y/y)
• • YouTube ad revenue: $8.89 billion (+12% y/y)
• • Google Network revenue: $7.42 billion (-3% y/y)
• • Revenue from Google Subscriptions, Platforms and Devices $9.79 billion (+17% y/y)
• • Revenue from Google Cloud $10.79 billion (+28%)
• • Other revenues: USD 377.2 million
• Estimated earnings per share (GAAP EPS): $1.83
• Estimated operating income $26.64 billion
• • Estimated operating income from Google services $28.47 billion
• • Estimated operating income from Google Cloud $1.11 billion
• • Estimated operating loss from other sources: $1.16 billion
• Estimated operating margin 31.4%
• Estimated capital expenditures of $12.88 billion

Implied change after results above 6%

The options market values the estimated change after the results at 6.33%. The average change in price for the last 5 publications of quarterly results is 7.19%, with the highest change being a 12.05% increase and the smallest variation being a 4.4% decrease. Interestingly, in 3 cases out of the 5 publications, trading ended with declines from the closing price of the session preceding the results, and each of the five sessions following the results closed below the opening price. Currently, out of 70 recommendations, 58 reports recommend buying the company, and the average target price is $202.85, which is about 21% higher than the current market price.

The implied change after Alphabet's results is 6.33%. Source: Bloomberg Finance L.P.