Growth Stocks: Alphabet (Google)

Shares of Alphabet  (GOOG.US) (GOOGL.US) were dragged down by disappointing results from Snap (SNAP.US) on July 21. Snap sent a shock wave through social media that affected all ad-based tech. But whether Alphabet has the same problems as SNAP won't be known until it gives us its report tonight after the closing bell on Wall Street.

The market estimates that second-quarter revenue will grow 14% year-on-year to $58.14 billion, while profit will rise 6% to $1.39 per share. Gross margin is also forecast to decline considerably in Q2 to 62.25% from 69.98% in Q2 2021, down -10.9% year-on-year.
Google Cloud revenue is forecast to grow 36.9% to $6.3 billion, while YouTube ad revenue is forecast to grow 7.9% to $7.55 billion.
Investors follow an important metric for Alphabet: Traffic Acquisition Costs (TAC) or what is the same, the expenses incurred by the company to obtain quality and real traffic, on its pages, for later monetization. Over the years, Google has been able to reduce its traffic acquisition costs and, in any case, keep it stable. It is estimated that it has increased by 12.65% to $12.3 billion. If the company publishes a higher than expected TAC, the market would view it negatively.

Analysts have adjusted their estimates for Google ad revenue downward from $58.3 billion recently. Even though revenue estimates have been lowered, they are still at the higher end of the range from mid-2021, indicating that analysts are not yet expecting a significant slowdown in Alphabet's ad business, setting a bar. high for the company to overcome.

You can read our preview of the Alphabet (Google) results at the following link: HERE

source: Bloomberg

Overall revenue and profit estimates haven't been adjusted much either. So if there are external pressures from weakening ad sales, at least for now they haven't been reflected in earnings or revenue estimates, meaning Alphabet has only one option: It has to deliver this quarter and beat those forecasts. elevated.

According to Bloomberg, as of July 17, 34 analysts have submitted their estimates for Google's results. Total sales are estimated between $66.85 billion and $72.06 billion, with a median estimate of $69.95 billion. In particular, if we take the average as a target, sales are estimated to grow 13.03% compared to the same quarter of 2021. While for earnings per share, the target is in the range of $1.05 and $1.54, respectively, with a mean of $1.29.

source: Seeking Alpha

Looking ahead to Alphabet's second quarter results, sentiment is weak. For reference, since early 2022, analysts have consistently revised the company's EPS estimates downward to reflect macroeconomic challenges and likely tougher competition for advertisers cutting ad budgets. As a result, Google shares are down approximately 22% year to date. As we can see in the image above.

source: Bloomberg

Are Google Stocks Cheap or Not?

Still, something seems amiss with stocks currently, as they have fallen in step with the market and look very cheap, trading at just 16.6 times next twelve month earnings estimates and trading at the low end of its historical range. Even when adjusted for its expected long-term growth rate, the PEG ratio is only 0.70x, well below 1x, while the price-to-sales ratio is around 5.5x. Both are at the low end of their historical ranges and look cheap.

This presents investors with two options: either the stock is incredibly cheap, or the market fears that future earnings and income forecasts are too high and need to be adjusted lower. Not even the recent split in its shares from 20 to 1 has been a significant boost, despite the fact that liquidity and trading have increased substantially.

For reference, Netflix's (NFLX.US) second quarter results were not spectacular. In fact, considering the company's high-growth track record, an 8.6% rise in depressed earnings estimates is questionably positive. However, the sentiment around Netflix and the streaming industry was so depressed that the stock appreciated more than 15% in 5 days when the results were simply less bad than what the market expected.

source: Bloomberg

Technical view

Investors therefore fear the company will post disappointing results on Tuesday or view growth forecasts as too high. The technical aspect of Alphabet is very weak, with a long-term bearish trend in its relative strength index (RSI). Additionally, stocks have been consolidating sideways since early May, between $100 and $120. This sideways consolidation formed after the stock suffered a significant drop. This creates what appears to be a technical pattern known as a bear flag that could cause the stock to drop significantly. Where the support level to watch on a downside move would be $100. If this level were to be lost, the downside could extend to $90.

source: xStation

Alphabet has had a fantastic growth story in recent years and has a bright long-term future, given its dominant position as a search engine as well as in advertising and its growing dominance in streaming services. However, that doesn't mean the company isn't prone to problems from time to time. The stock may be entering one of those tough times right now.

Looking ahead to Google's second quarter results, sentiment is weak. For reference, since early 2022, analysts have consistently revised the company's EPS estimates downward to reflect macroeconomic challenges and likely tougher competition for advertisers cutting ad budgets. As a result, Google shares are down approximately 22% year to date.
one more argument

On the other hand, Google announced a $70 billion share buyback program in the first quarter of 2022. That is 5% of the company's total market capitalization. On April 20, 2022, Alphabet's Board of Directors authorized the company to repurchase up to an additional $70 billion of its Class A and Class C shares in a manner deemed to be in the best interest of the company and its shareholders, taking taking into account the economic cost and prevailing market conditions, including the relative prices and trading volumes of Class A and Class C shares.

Recall that as of the first quarter of 2022, Google still had more than $134 billion in cash and cash equivalents on the balance sheet and the company is likely to take advantage of the depressed stock price to buy back many more shares in the future. While there's no downside to the company increasing the program in the future, there's a compelling upside if Google does. In any case, a 5% share buyback program should provide significant support to the company's valuation.

Risks and Conclusions

As for the results, there are two main risks: First, there is, of course, the possibility that Snap's results are not isolated, but rather a guide to the entire digital ad space. Second, it could be that even if Google beats expectations, the market remains fearful regarding the company's performance in the second half of 2022. In that case, investors would likely look to take advantage of the current price and sell now. that the results are known.

That said, Google's guidance will be important. But the inverse must also be taken into account: that despite Google offering weak results, investors will take the opportunity to buy the pessimism in the share price simply because it is Google.

Google shares are trading at a 12-month P/E of around 19.5x. This is too low for a high-growth FAAMNG stock like Alphabet (Google).
 
Dario Garcia, EFA
XTB Spain