Alphabet 3Q Preview: Why It Should Be A Buy On Any Earnings Weakness
Investing.com | Oct 28, 2019 10:02
* Reports Q3 2019 results on Monday, Oct. 28, after the close
* Revenue expectation: $40.3 billion
* EPS expectation: $12.28
For search-engine giant Google's parent Alphabet (NASDAQ:GOOGL), it’s more important than ever to show investors that its growth generator remains intact at a time when it’s facing one of the most intense antitrust probes of our times.
And indeed, despite this uncertain regulatory environment, there is no sign that spending on digital advertising is weakening. For that reason, analysts expect 19% growth in Google’s sales to $40.3 billion in the third quarter, and about the same growth for the current fiscal year.
But the high level of scrutiny means that a slight miss in Alphabet’s revenue performance could cause a big negative move in its shares. Its stock closed on Friday at $1,264.30, having gained 13% this year. The shares have been under pressure for most of this year on concerns that higher spending could hurt the bottom-line.
Alphabet and Amazon.com (NASDAQ:AMZN) are among the companies being examined in the U.S. Justice Department's broad antitrust review into whether the world’s biggest technology firms are stifling competition.
The Justice Department’s antitrust chief, Makan Delrahim said at a Wall Street Journal tech conference this month that a breakup of a tech company is “perfectly on the table” if justified by the evidence uncovered in the probe.
Separately, the attorneys general of 48 U.S. states, the Federal Trade Commission, U.S. congressional committees and Europe’s anti-monopoly authority are also investigating Alphabet and other tech giants.
h2 Google’s Wide Moat/h2This is not the first time Google is facing antitrust investigations. It dealt with a long federal inquiry that ended in 2013 without significant damage to the company. This time, however, the size and scope of these probes is large enough to create panic among investors and uncertainty for its shares.
The question for investors is whether they should continue to focus on the company’s business fundamentals or start taking into account a potential adverse outcome of these probes, which could take years to complete.
Get The App
In our view, Google is a company with a strong moat that is almost impossible to challenge. More than 90% of all internet searches take place through Google and its company subsidiary YouTube. Every day, Google processes 3.5 billion searches that make its platform the most valuable for advertisers.
That means companies have little choice but to advertise on Google's platform. Because of its huge internet presence, the mammoth search engine dominates the digital advertising market with a 40% control of the market globally.
It’s almost impossible to predict the outcome of these regulatory probes and their impact on Google's business, but if history offers any clue, such probes usually end up with a large fine, and impose changes to the company’s internal practices. Google has dealt with both in Europe recently, without losing its market share there.
The company, with its strong financial muscle, is at the forefront of new technology innovations that will fuel future growth and could help diversify its revenue away from ad business. In particular, self-driving car technology presents the greatest opportunity of all for Alphabet.
According to a recent note by Deutsche Bank analysts, Alphabet’s cloud business alone is now worth $225 billion. The unit could report compound annual growth of 55% between 2018 and 2022, and reach annual sales of about $38 billion by 2025, the analysts wrote.
Bottom Line
Google has the financial power and future growth strategy to deal with any upcoming challenges from regulatory actions and increased competition. The noise created by the latest antitrust probes, in our view, shouldn’t detract investors from what it has to offer. With its traditional growth drivers remaining unchallenged and the company positioning itself to grab a major share of new growth areas, it’s a no-brainer to stick with your Alphabet holdings.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.