I was tasked by Real Money's editors to identify two stocks that I believe will decline in October. The two I picked weren't chosen because of the potential for exogenous shocks, calamitous market crashes or other such October surprises. No, I believe they will decline next month due to the most basic of fundamental stock catalysts: quarterly earnings reports.
My first pick was Tesla (TSLA) . My second pick is also earnings-related. Alphabet's (GOOGL) third-quarter earnings conference call is set for 4:30 p.m. ET Oct. 26. I believe Alphabet management, and specifically CFO Ruth Porat, will continue to note that traffic acquisition costs (TAC) are rising faster than revenues. This margin pressure was evident in second-quarter earnings, as Google search revenues rose 21% and TAC rose 28%, and I believe that margin compression will continue. (Alphabet is part of TheStreet's Action Alerts PLUS portfolio.)
Analysts seem to prioritize revenues vs. costs when analyzing Google, but Porat was clear that cost pressures will continue.
She also noted this on the second-quarter conference call:
"A couple of Google reminders for the third quarter. Headcount additions tend to be seasonally high in Q3, because that is when we bring on new graduates. In addition, please keep in mind that our marketing costs are typically weighted more heavily toward the back half of the year due to the holiday season...."
According to Zacks, only two of the 17 analysts following GOOGL have revised estimates in the last month -- one in each direction -- so there really has not been a reaction to Porat's comments. I believe that is in error, and I believe analysts will have to lower those estimates -- current consensus EPS is $30.94 for 2017 and $40.61 for 2018 -- in reaction to Alphabet's third-quarter results. Downward revisions generally lead to downward movement in share price.
