Alphabet (GOOGL) Up 6.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Alphabet (GOOGL). Shares have added about 6.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Alphabet due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Alphabet Q2 Earnings and Revenues Beat Estimates

Alphabet Inc.’s non-GAAP earnings of $10.13 per share for second-quarter 2020 surpassed the Zacks Consensus Estimate of $8.43. Earnings increased 2.6% sequentially but decreased 28.7% year over year.

Net revenues — excluding total traffic acquisition cost or TAC (TAC is the portion of revenues shared with Google’s partners, and amounts paid to distribution partners and others who direct traffic to the Google website) — came in at $31.60 billion. The figure was down 6.2% sequentially and 0.3% year over year.

The decrease in advertising revenues was due to the coronavirus pandemic, which in turn resulted in a decline in consumer and business spending.

However, net revenues outpaced the Zacks Consensus Estimate by 3.3% driven by strength in the company’s cloud and YouTube businesses.

Notably, primary drivers of the Google business haven’t changed. Yet, pricing remains under pressure, both on account of nagging FX concerns, and persistent strength in mobile and TrueView.

Nonetheless, Google continues to enjoy strength in the cloud business. The company’s Google Cloud recorded 43.2% year-over-year revenue growth in the quarter. It is to be noted that the firm will continue to invest in this space.

YouTube remains a strong contributor to the company’s growth. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day. However, time and again it faces continuous pressure from advertisers to tighten controls on the fast-growing YouTube video service, in a bid to avoid adult or offensive content.

Numbers in Detail

Revenues

Gross total revenues of $38.3 billion decreased 7% sequentially and 1.7% year over year (flat year over year in constant currency). The decrease was due to lower search and advertising revenues.

Google Segment

The segment includes search, advertising, Play, hardware, and Cloud & Apps.

Beginning fourth-quarter 2019, Alphabet disaggregated revenue segments, including Search, YouTube ads and Cloud.

Coming to the search business, revenues from Google-owned and partner sites declined 7.8% and 9.8% year over year, accounting for 65.6% and 12.4% of quarterly revenues, respectively. This resulted in a year-over-year decrease of 8.1% in total advertising revenues.

YouTube grew 5.8% year over year to $3.8 billion, accounting for 10% of quarterly revenues. Google other revenues — which consist of YouTube non-advertising revenues — were $5.1 billion for the second quarter, up 25.6% year over year.

In addition, Google cloud grew 43.2% year over year to $3 billion, accounting for 7.9% of quarterly revenues.

Other Bets Segment

Other Bets revenues were $148 million, up 9.6% sequentially but down 8.6% year over year, accounting for 0.4% of total second-quarter revenues.

Total traffic acquisition cost or TAC was down 10.2% sequentially and 7.5% year over year.

Operating Results

Operating margin was 16.7%, up 690 basis points from the year-ago quarter.

Operating expenses (including research and development, sales and marketing, as well as general and administrative expenses) were $13.4 billion, up 7.2% from the year-ago quarter.

The increase in expenses was a result of heavy investment in the cloud-computing business, artificial intelligence and consumer hardware, among others.

Balance Sheet

At second quarter-end, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of $121.1 billion, up from $117.2 billion in the comparable prior-quarter period.

The company generated $14 billion cash from operations in the second quarter and spent $5.4 billion on capex, netting a free cash flow of $8.6 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 7.83% due to these changes.

VGM Scores

Currently, Alphabet has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Alphabet has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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