Why Is Alphabet (GOOGL) Up 11.4% Since the Last Earnings Report?
Zacks Equity Research
Updated
A month has gone by since the last earnings report for Alphabet Inc. GOOGL. Shares have added about 11.4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? 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 catalysts.
Alphabet Beats Earnings & Revenue Estimates in Q1
Alphabet’s first-quarter earnings of $7.73 exceeded the Zacks Consensus Estimate of $7.24. Also, earnings were up 2.2% sequentially and 28.4% year over year.
On the Other Bets front, most of the businesses included there are in early stages. However, it is gradually picking up.
The main drivers of the Google business haven’t changed. Pricing remains under pressure both on account of nagging FX concerns as well as continued strength in mobile and TrueView. However, volumes are encouraging as total paid click growth of 44% remains a reassuring number.
Google continues to enjoy strength on the mobile platform. One of the drivers is Accelerated Mobile Pages (AMP), which is being accepted by a number of publishers and sites across the world covering more than 700,000 domains. 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 data base. As a result, direct response marketers continue to show interest in it.
Google also mentioned messaging as an important addition to its product line in the form of Allo (mobile messaging) and Duo (video messaging) to further drive user experience. Also, the company said that Google Cloud is generating substantial revenue growth, reflecting the ongoing momentum in the business.
The company has greater control on the browser through Android as well as distribution agreements with Apple (AAPL). However, the upcoming threats should not be ignored. Apple may not renew its agreement; Microsoft (MSFT) Windows 10 could steal overall search market share; Facebook (FB) graph search and the social network could take away advertising dollars; and Amazon (AMZN) already takes care of most product searches.
Management said that YouTube remains a strong contributor benefiting from growth in online video consumption. More than a thousand creators are currently engaged with the platform, bringing in a thousand subscribers every day. The company also said that problems such as an advertiser boycott of YouTube did not have much impact on the quarter’s results.
Finally, Google platforms like Android, Chrome and Daydream continue to help it in drawing more users and selling more ads.
Revenues
Gross total revenue of $24.8 billion was down 5% sequentially but up 22.2% year over year (up 24% in constant currency or CC). The year over year increase was primarily driven by strength in core advertising business.
Google Segment
The segment includes search, advertising, Play, hardware and Cloud & Apps.
Coming to the search business, revenues from Google-owned sites declined 3.1% on a sequential basis, while that from partner sites decreased 9.5%, resulting in a total advertising revenue decline of 4.4%. However, Google-owned sites and partner sites grew 21.5% and 8.6%, respectively, year over year, and brought in 70% and 16% of quarterly revenues.
Management said that mobile search continued to benefit from improvements in ad formats and delivery initiated in the third quarter of 2015 as well as remained optimistic about search revenue growth on both tablets and desktops.
Other revenue decreased 9.1% sequentially but increased 49.4% year over year to account for 12.5% of first-quarter revenue.
Other Bets Segment
Alphabet broke out the segment in the March quarter of 2016. The segment includes Fiber, Verily, Calico, Nest and incubation activities in X Labs. Revenues were down 6.9% sequentially but up 47.9% year over year.
Since this segment is a combination of several businesses that are in the pre-revenue stage, operating different models and serving diverse end markets, the results are likely to be soft in any given quarter.
Total traffic acquisition cost, or TAC (the portion of revenue shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website) was down 4.5% sequentially and 22.2% year over year.
TAC paid out to network partners was down 8.4% sequentially but up 9.8% year over year. Mobile search carries higher TAC so the increase in mobile search revenue is driving related TAC according to management.
TAC for distribution arrangements was up 2.2% sequentially and 48.3% year over year.
Net advertising revenue, excluding TAC was down 4.4% sequentially but up 17.9% year over year.
Revenue net of TAC came in at $20.12 billion, down 5.2% sequentially but up 22.2% year over year. The top line beat the Zacks Consensus Estimate of $19.65 billion.
Margins
Gross margin of 60.4% increased 133 bps sequentially but was down 182 bps from the year-ago quarter.
Price declines remained negative in both sequential and year-over-year comparisons as the mix continued to move toward lower-margin business.
Cost per click (CPC) was down a respective 4% and 19% from the previous and year-ago quarters. On a sequential basis, CPC was down 3% on Google sites and 9% on network sites. On Google sites, CPCs were down 21% from the year-ago quarter, while network CPC declined 17%.
Paid clicks grew 2% sequentially and 44% year over year, driven partly by growing volumes of mobile and TrueView ads on YouTube. Google sites paid clicks grew 1% and 53%, respectively, from the previous and year-ago quarters, while Network paid clicks also increased 6% sequentially and 10% from the year-ago quarter.
Operating expenses of $8.39 billion decreased 4.3% sequentially but up 15.4% year over year. The operating margin was 26.5%, up 107 bps sequentially and 17 bps from the year-ago quarter.
Alphabet reported net income of $5.43 billion compared with $5.33 billion in the previous quarter and $4.21 billion in the year-ago quarter. GAAP earnings of $7.73 per share were down from $7.56 in the previous quarter but up from $6.02 in the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $92.44 billion, up $6.11 billion from the fourth quarter. The company generated around $9.55 billion of cash from operations in the first quarter and spent $2.51 billion on capex, netting a free cash flow of $7.04 billion.
Alphabet also spent $101 million on acquisitions and $18 million to repay some debt.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
Alphabet Inc. Price and Consensus
Alphabet Inc. Price and Consensus | Alphabet Inc. Quote
VGM Scores
At this time, Alphabet's stock has a nice Growth Score of 'B', though it is lagging a lot on the momentum front with an 'F'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
The stock is suitable solely for growth investors, based on our styles scores.
Outlook
The stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.
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