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Will Google-Parent Alphabet Top or Flop in Q1 Earnings?

Tirthankar Chakraborty

Google-parent Alphabet Inc. GOOGL is set to report first-quarter earnings results later today. Alphabet has surpassed Wall Street expectations in every quarter in 2018. Thus, a good earnings result for first-quarter 2019 should impress investors but the task won’t be easy this time around.

 

EU Fines: A Headache

 

Last month, the European Union (EU) imposed a 1.5 billion euro, or approximately $1.7 billion, antitrust fine on the Internet search giant. EU was concerned with Alphabet’s anticompetitive practices. Basically, the EU charged Alphabet for compelling third-party websites who use Google’s search engine to disproportionately display Google-linked advertisements. 

 

This is the third time that EU has imposed such a hefty fine on Alphabet in about three years. The legislative body imposed a record 4.34 billion euros or $5 billion fine last year, accusing Alphabet of abusing its dominant market position in mobile. Alphabet was instructed to stop selling Chrome and search apps in its Android mobile operating system.

 

Such fines certainly don’t bode well for Alphabet, as advertisements represent a large portion of its revenues. Alphabet did confirm that it will be paying the latest fines, in compliance with accounting rules and acknowledged that such a fine may have an impact on its operating income and earnings per share in the first quarter.

 

The Bright Side

 

Last year, Alphabet was able to beat analysts’ quarterly earnings estimates by an average of nearly 27%. And this was predominantly because of profits from investments made. Out of Alphabet’s net profit of $30.74 billion in 2018, more than $4 billion came from the increase in the value of investments. 

 

And in the first quarter of this year as well, investments can provide some meaningful boost to earnings. After all, some of the recent investment ventures did pay off amid a wave of initial public offerings (IPO). Stifel analyst Scott Devitt noted that “the Lyft IPO should also result in a meaningful investment gain in 1Q.”

 

Alphabet’s sales and its outlook might improve on success in the lucrative cloud computing market. Lest we forget, Alphabet’s ‘other revenue’ bucket that does include the cloud, hardware and Google Play is rapidly growing. Alphabet now holds the third position in the cloud business, behind Amazon.com, Inc. AMZN and Microsoft Corporation MSFT.

 

Waymo, the self driving car unit of Alphabet, also recently started to add to revenues. Alphabet had launched its first driverless-car service in Arizona last December and vowed to proceed “carefully” with the technology.

 

Last but not the least, if we go back to the EU charges,the commission didn’t order any changes to Alphabet’s business and thus it won’t have any impact on the company’s fundamentals.

 

Will Alphabet be Able to Crush Expectations Again?

 

If Alphabet doesn’t take into account the latest fines in their estimates, then simply banking on competitive advantage and growth in its cloud computing and driverless car segments should drive its results. The Zacks Rank #3 (Hold) company is widely expected to report a solid $10.37 of earnings per share for the first quarter, slightly short of $13.33 reported a year ago. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

If this wasn’t enough, the Zacks Consensus Estimate for its current fiscal year earnings has managed to move up 0.02% in the past 60 days.

 

 

 

At the same time, Alphabet has a positive earnings surprise history and the trend is more likely to stay.

 

 

 

Revenues, in the meantime, for the first quarter are expected to come in at $29.98 billion. More importantly, its core advertising business is projected to jump approximately 18% from $26.64 billion in the year-ago period to reach $31.49 billion in the first quarter. This should certainly help the company’s shares gain traction in the near term. The company’s shares are expected to gain 8.7% for the current year, higher than the Internet - Services industry’s projected rally of 2.3%. Alphabet also currently flaunts a Growth Score of A.

 

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