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Alphabet (GOOGL) Down 5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Alphabet (GOOGL). Shares have lost about 5% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Alphabet Beats Q1 Earnings Estimates, Lags Revenues

Alphabet Inc.’s non-GAAP earnings of $11.90 in first-quarter 2019 surpassed the Zacks Consensus Estimate of $10.57 per share. However, the reported earnings decreased 6.8% sequentially and 19.8% 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 $29.48 billion, down 7.4% sequentially but up 18.6% year over year.

The net revenues missed the Zacks Consensus Estimate of $29.99 billion.

The decrease can be attributed to increased competition, slowdown in sales growth, weaker-than-expected advertising business and slowing smartphone business. The company is facing increased competition from major players for ad spending such as Facebook Inc., Snap Inc., Amazon.com Inc. and Twitter Inc.

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

Nonetheless, Google continues to enjoy strength in the mobile platform. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals by studying mobile searches from its huge database. As a result, direct response marketers continue to show interest in it.

The company stated that Google Cloud is recording substantial revenue growth, reflecting ongoing momentum in the business.

YouTube, which remains a strong contributor to the company’s growth, is benefiting from improvement in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day.

However, it is facing continuous pressure from advertisers to tighten controls on the fast-growing YouTube video service to avoid adult or offensive content.

Numbers in Detail

Revenues

Gross total revenues of $36.3 billion decreased 7.5% sequentially but increased 16.7% year over year (up 19% in constant currency or CC). The increase was primarily driven by strength in mobile search. Also, contributions from YouTube and cloud aided its revenues.

Google Segment

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

Coming to the search business, revenues from Google-owned sites were down 5% on a sequential basis and that of partner sites decreased 10.5%, resulting in a decrease of 5.9% in total advertising revenues.

Google-owned and partner sites grew 16.7% and 8.5% year over year, respectively, accounting for 70.7% and 13.7% of the company’s quarterly revenues. This resulted in an increase of 15.3% in total advertising revenues on a year-over-year basis.

Other revenues decreased 16% sequentially but increased 25.1% year over year, accounting for 15% of first-quarter revenues.

Other Bets Segment

In the first quarter, Other Bets revenues were $170 million, up 10.4% sequentially and 13.3% year over year, accounting for 0.5% of the total revenues.

Total traffic acquisition cost or TAC was down 7.7% sequentially but up 9.1% year over year.

TAC paid out to network partners decreased 11.5% sequentially but increased 2.7% year over year. Given mobile search carries higher TAC, the increase in mobile search revenues is driving related TAC, according to management.

TAC for distribution arrangements was down 3.5% sequentially but up 16.6% year over year.

Operating Results

Cost per click (CPC) on Google sites was up 5% sequentially but down 19% from the year-ago quarter. Cost-per-impression on Google Network Members' properties decreased 14% sequentially but increased 1% year over year.

Paid clicks on Google properties were down 9% sequentially but up 39% from the year-ago quarter. Google Impressions on Google Network Members' properties increased 5% on a sequential and 6% on a year-over-year basis.

Operating expenses, including the impact of the EC fine, were $13.7 billion. However, excluding the same, operating expenses rose 20% year over year to $12 billion.

Excluding the impact of the EC fine, operating income was $8.3 billion, up 9% year over year on an operating margin of 23%.

Balance Sheet

At the end of the first quarter, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of around $113.5 billion, up from $109.1 billion in the prior-quarter period. The company generated around $12 billion cash from operations in the first quarter and spent $4.6 billion on capex, netting a free cash flow of $7.4 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

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 downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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