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Look Beyond Profits, Revenue As Alphabet Stock Reports Earnings

Will Healy

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reports its earnings on Monday, Oct. 28 after the bell. The Google parent continues as a wellspring for innovation. However, Google stock has thus far reflected the value of its creations poorly. Alphabet may excite investors with earnings, revenue or guidance. However, if it wants to deliver more significant gains to shareholders, they should consider looking at something besides financials.

Wall Street predicts that the company will earn $12.38 per share in its third quarter. If that forecast holds, that will represent a 5.2% decline from the same quarter last year when profits came in at $13.06 per share. Analysts also project revenues of $40.3 billion for the quarter. That would come in 19.5% higher than the year-ago revenue figure of $33.7 billion.

From a fundamentals standpoint, Google stock looks like a buy. It appears history will look at the quarterly earnings drop as an anomaly. Analysts project profit growth of 11.3% this year and 14.3% in fiscal 2020. With a forward price-to-earnings ratio of around 22.7, I would call this fairly valued, or perhaps slightly undervalued.

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More importantly, it goes far beyond dominating internet search or powering mobile devices through its Android operating system. It succeeds in so many industries that it has become more of a conglomerate than a tech company in many respects. Alphabet leads the way in self-driving cars through Waymo and it researches health applications through Verily Life Sciences. It even leads in some unexpected areas. An Iowa State University study found that academic researchers prefer to use its Google Scholar research tool, for example.

GOOGL Holds Tremendous Unlocked Value

Analysts will probably look for many different things in the earnings report. Some will tell people to look for revenue and earnings, something GOOGL stock accomplishes most of the time. Others may say to pay attention to the guidance.

As for me, I wonder when the company plans to unlock its value? InvestorPlace’s Will Ashworth says that it will “generate cash at a tremendous rate.” With $121.1 billion in cash and cash equivalents as of the end of the second quarter, he’s right. This makes it all the more mind-boggling that they do not follow the lead of Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) or Cisco (NASDAQ:CSCO) and pay a dividend.

Moreover, the companies Alphabet has created under its umbrella hold tremendous value. About 86% of Alphabet’s revenue in the last quarter came from advertising. Everyone knows that percentage will fall. Indeed, many of its creations will drive future profit growth. However, the need to hold on to innovations has locked up hundreds of billions in market value.

In my previous articles about Google stock, I keep going back to the estimate that places the value of Waymo at $175 billion. Moreover, going back to Will Ashworth’s article, he valued the cash hoard alone at $175 per share. Take these as well as Alphabet’s other businesses, and the current $874 billion market cap appears low. If GOOGL stock could more closely reflect the sum of its parts instead of the value of its whole, I could see it going much higher.

The Bottom Line on Google Stock

Google stock could surge higher if it used the earnings report as an occasion to unlock some of the company’s value. Analysts can speculate on how earnings, revenue and guidance will look after the release of the third-quarter report on Oct. 28.

However, if the company wants to send Google stock higher, it should bring some of its value to the forefront. The current Alphabet stock price stands at around $1,260 per share. Though that comes close to all-time highs, GOOGL stock has never moved above $1,300 per share.

Unlocking value would take Google stock to levels far above $1,300 per share. It would also mean that GOOGL could finally benefit from more of the success of its parent company.

This hope may make a speculative position in Google stock worthwhile. Also, with double-digit profit growth, GOOGL probably rises longer term. However, unlocking value will likely make the difference between growing slowly or rapidly. I hope the company makes the latter possible.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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