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Alphabet (GOOGL) Down 2.3% Since Last Earnings Report: Can It Rebound?

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Zacks Equity Research
·4 min read
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It has been about a month since the last earnings report for Alphabet (GOOGL). Shares have lost about 2.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Alphabet due for a breakout? 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 Q4 Earnings and Revenues Beat Estimates

Alphabet Inc.’s non-GAAP earnings of $22.30 per share for fourth-quarter 2020 surpassed the Zacks Consensus Estimate of $15.91. Earnings increased 36% sequentially and 45.3% 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 $46.43 billion.

The figure was up 22.2% sequentially and 23.6% year over year. Also, net revenues outpaced the Zacks Consensus Estimate by 5.31% driven by strength in the company’s search, 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 46.6% year-over-year revenue growth for the quarter. It is to be noted that the firm will continue to invest in this space.

Markedly, advertising sales surged across all regions and industries during the quarter.

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 $56.9 billion increased 23.2% sequentially and 23% year over year (up 23% in constant currency).

The increase was driven by higher advertiser spend in Search and YouTube, as well as persistent strength in Google Cloud and Play.

Google Segment

The segment includes Google Services, Google Cloud and Other Bets.

Google Services Segment

Revenues from the Google services business increased 22.4% year over year to $52.8 billion, accounting for 92.9% of quarterly revenues.

Under the services business, search revenues from Google-owned sites increased 17.4% year over year.

YouTube advertising revenues grew 46% year over year to $6.9 billion, while Network advertising revenues increased 23% to $7.4 billion.

Google other revenues — which consist of YouTube non-advertising revenues — were $6.7 billion for the fourth quarter, up 26.8% year over year, driven by growth in YouTube non-advertising and Play revenues.

Total Google advertising revenues grew 21.8% year over year to $46.2 billion.

Google Cloud Segment

In addition, Google Cloud revenues grew 46.6% year over year to $3.8 billion, accounting for 6.7% of the quarterly revenues. Strong growth in Google Workspace revenues was driven by growth in both seats and average revenue per seat.

Other Bets Segment

Other Bets revenues were $196 million, up 14% year over year, accounting for 0.3% of total fourth-quarter revenues.

Total traffic acquisition cost or TAC was up 23.1% year over year to $10.5 billion.

Operating Results

Operating margin was 28%, up 800 basis points from the year-ago quarter.

Operating expenses (including research and development, sales and marketing, as well as general and administrative expenses) were $15.2 billion, down 3.9% from the year-ago quarter.

Balance Sheet

At fourth quarter-end, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of $136.7 billion, up from $119.7 billion in the comparable prior-quarter period.

The company generated $22.7 billion cash from operations for the fourth quarter and spent $5.5 billion on capex, netting a free cash flow of $17.2 billion.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 12.34% due to these changes.

VGM Scores

At this time, Alphabet has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, 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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