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Alphabet (GOOGL) Up 5.8% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Alphabet (GOOGL). Shares have added about 5.8% in that time frame, outperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

Alphabet Q1 Earnings Miss, Revenues Beat Estimates

Alphabet Inc.’s non-GAAP earnings of $9.87 per share in first-quarter 2020 missed the Zacks Consensus Estimate of $10.97. Also, earnings decreased 35.7% sequentially and 17.1% 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 $33.7 billion. The figure was down 11.5% sequentially but up 14.3% year over year.

Net revenues outpaced the Zacks Consensus Estimate by 3.4%, driven by strength in the company’s cloud and YouTube businesses.

Following weaker-than-expected advertising revenues in the first quarter, Alphabet’s share price was down approximately 3%. The decrease in advertising revenues was due to the outbreak of the coronavirus pandemic, which in turn resulted in a decline in consumer and business spending.

Notably, 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 cloud business. The company’s Google Cloud recorded 52.1% 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 $41.2 billion decreased 10.7% sequentially but increased 13.3% year over year (up 15% in constant currency). The increase reflects strong demand for the company’s search, YouTube and cloud.

Google Segment

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

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

Coming to the search business, revenues from Google-owned and partner sites grew 11.6% and 4.1% year over year, accounting for 69.3% and 12.7% of quarterly revenues, respectively. This resulted in a year-over-year increase of 10.4% in total advertising revenues.

YouTube grew 33.4% year over year to $4 billion, accounting for 9.8% of quarterly revenues. Google other revenues — which consists of YouTube non-advertising revenues — were $4.4 billion in the first quarter, up 22.5% year over year.

In addition, Google cloud grew 52.1% year over year to $2.8 billion, accounting for 6.7% of quarterly revenues.

Other Bets Segment

Other Bets revenues were $135 million, down 21.5% sequentially and 20.6% year over year, accounting for 0.3% of total first-quarter revenues.

Total traffic acquisition cost or TAC was down 12.3% sequentially but up 8.6% year over year.

Operating Results

Operating margin was 19.4%, up 120 basis points from the year-ago quarter.

Operating expenses (including research and development, sales and marketing, as well as general and administrative expenses) were $14.2 billion, up 18.1% 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 the end of the first quarter, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of $117.2 billion, down from $119.7 billion in the comparable prior-quarter period.

The company generated $11.5 billion cash from operations in the first quarter and spent $6 billion on capex, netting a free cash flow of $5.4 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

At this time, Alphabet has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. 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 C. 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 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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