Summary:
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Alphabet (GOOGL.US) has underperformed lately on the back of data leak and planned expansion to China
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Company scheduled to release third quarter earnings next Thursday
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Alphabet expects further slowdown in the cost growth
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Investors will look whether non-core business continue to develop rapidly
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Alphabet failed to climb back above the 200-session moving average and plunged out of the downward price channel
Investors’ sentiment towards Alphabet (GOOGL.US) deteriorated greatly over the past couple of months on the back of data leak issues and planned expansion into China. However, the upcoming earnings report for the third quarter of the year may boost outlook for the stock as the company announced further slowdown in the cost growth measures.
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Alphabet enjoyed a continuous improvement in revenue and earnings metrics in the 2005-2017 period with just a minor slowdown in revenue growth following the financial crisis. Source: Bloomberg, XTB Research
Alphabet (GOOGL.US) received a lot of unwanted attention recently. First, the company got a bad publicity as its executives refused to participate in the Senate Intelligence Committee hearing in September. Another source of criticism came from company’s plans to relaunch search engine in China (Alphabet shut its Chinese search engine in 2010). China is enormous market and penetrating it would result in significant advertising revenues as well as access to valuable user data. However, many criticized the move as being unethical due to the fact that Alphabet would need to adhere to the Chinese censorship rules in case it wants to launch a search engine in the country. It would mean blocking results for queries like Tibet, Taiwan or Chairman Mao. Last but not least, Alphabet was also hit by issues connected to Google+, a social network that struggled to be successful. Namely, the company has hidden the fact that data of more than half a million Google+ users was exposed to third parties. All of the issues combined deteriorated the sentiment towards the stock and in turn saw it dropping around 13% from its ATH at $1290.
Share of Traffic Acquisition Costs in the Alphabet’s operating expenses structure was quite stable in the 2014-2017 period. However, this share moved significantly lower in the second quarter of 2018 as TAC growth began to slow. Source: Bloomberg, XTB Research
However, there is a scope for a change next week as Alphabet will release earnings report for the third quarter of 2018. Let us recall that the company managed to boost its revenue to $32.66 billion marking a 26% YoY increase in the second quarter of 2018. Indeed, earnings per share turned out to be smaller than in the second quarter of 2017 but it was mostly ascribed to the one-off factor - $5 billion fine imposed by the European Union. Adjusting earnings for the impact of the fine EPS ratio would offer a 32% beat over median estimate. Another pleasing development in the second quarter earnings report was a slowdown in TAC growth. TAC stands for Traffic Acquisition Costs and is an expenditure Alphabet makes to partner companies for directing users to its search engine. After few quarters of accelerating growth in this segment the latest report finally saw deceleration.
Alphabet experienced a huge drop in earnings in the fourth quarter of 2017. However, it was associated with one-off impact of the US tax reform rather than with deterioration in business. Source: Bloomberg, XTB Research
When it comes to the third quarter earnings markets expect revenue to reach $27.34 billion and that would mark over 22% increase YoY. Net income is expected to come in at $8.86 billion, implying a 6.5% YoY advance. EPS is viewed to reach $12.87. Aforementioned TAC will be among measures of interest for investors as the company announced it expects TAC growth to continue to slow in the quarters to come. Also segments outside Alphabet’s core business will be closely watched as the previous earnings report showed that they expand robustly. Google Play, cloud computing and hardware sales are grouped in the “Other” segment on the Alphabet’s statements and they have generated revenue of $4.4 billion in the previous quarter (36% YoY increase). In “Other bets” segment one can find for example Waymo, Alphabet’s self-driving vehicle segment. “Other bets” segment provided company with $145 million revenue in the previous quarter (49% YoY increase).
Alphabet (GOOGL.US) along with most of the US companies marched to new all time high earlier this year. However, as issues concerning data protection began to mount the stock started to underperform. The latest steep declines on Wall Street saw share price breaking below the downward price channel. Source: xStation5
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