Technology

Is Alphabet's 'Trillionaire' or New-Conglomerate Status More Important With Earnings?

Jon C. Ogg

Published: January 31, 2020 2:19 pm

Last Updated: February 1, 2020 8:03 am

Alphabet Inc. (NASDAQ: GOOGL) has pulled back from its recent highs of about $1,500 ahead of next week’s earnings. The company most investors still refer to as Google now appears to have lost its place in the $1 trillion market cap club. That may reverse if only a 1% rally occurs. The report is due on Monday, February 3, and many investors are on pins and needles to see if it can post a great report similar to what was seen from Amazon, Microsoft and Apple.

Analysts are calling for earnings of $12.55 per share on revenues of $46.9 billion for the fourth quarter of 2019 in the Refinitiv consensus. For all of 2019, that would create a consensus of $46.32 per share in earnings and $162.75 billion in revenues. And those 2020 consensus estimates have a current view of $54.21 per share in earnings and almost $192 billion in revenues. That would value Alphabet at about 26 times expected 2020 earnings.

One big wild card, on top of Larry and Sergey handing over leadership of the companies to Sundar Pichai, is the current regulatory explorations into Alphabet’s dominance of Google within advertising and search. It is unknown if any attempts to carve businesses out is in the works at this point, but some have pondered this as a risk. Alphabet also can have myriad other factors that can limit the companies earnings if they spend too much on their “moonshot” efforts.

Over the course of January alone, analysts on Wall Street have aggressively been raising their target prices on Alphabet. The current consensus analyst target price of $1,539.28 may even be a tad higher by the time Monday rolls around as more recent target hikes get tallied up. The target hikes have been from Mizuho to $1,650, KeyBanc to more than $1,750, UBS to $1,675, and Morgan Stanley to $1,560. There have of course been other analysts raising targets as well.

For some history, note that Alphabet’s earnings were disappointing on the surface last quarter. The October report showed revenues up 20% nominally (22% currency-adjusted) to $40.5 billion, while the $10.12 in earnings per share was down from $13.12 per share a year earlier. Still, Alphabet’s operating income of almost $9.2 billion was up from just over $8.6 billion a year earlier. The company’s effective tax rate was also higher at 18% after having been just 9% a year earlier.

Google’s own properties showed a 19% gain in revenues to $28.65 billion last quarter, while its network members’ properties saw revenues rise 7.5% to $5.27 billion. Overall ad revenues were up 17% to $33.9 billion.  There was also a drop in the “other income” with a $549 million loss and that was driven by more than a $1.5 drop in the value of equity investments.

There are now too many parts within Alphabet and Google to point out the endless comparisons from last quarter to this quarter. In some ways, Alphabet has joined the ranks of companies adopting a “new conglomerate structure for the 21st century.” but many analysts and investors want to be able to properly evaluate the businesses outside of core search and advertising. And an additional problem there is that analysts who have known all there is to know about valuing search and advertising might not be as good at evaluating things like Waymo (and the Fitbit acquisition) and other so-called moonshots that Alphabet is involved in.

Alphabet recently announced a $25 billion buyback plan, but the company is still among the tech giants which does not offer a dividend yield. The company also counted a whopping $121 billion in total cash and investments on its balance sheet at the end of last September.

Alphabet shares were last seen down over $21.00 (1.45%) at $1,433.25 ahead of Friday’s closing bell. Its 52-week trading range is $1,027.03 to $1,500.38. That would put shares down about 4.5% from its recent highs while still being up over 7% so far in 2020.

Would it be too much to ask for everyone to just go back to the old Google name?