Alphabet's (GOOGL) earnings have major implications for the market on Monday.
Shares of the Mountain View, California-based search giant are higher as the market awaits the company's fourth quarter earnings results and 2019 forecast after Monday's market close.
"Companies such as Apple (AAPL) benefited from low expectations, but the big question now is how far they can run when the market starts to worry again about actual growth," James "Rev Shark" DePorre noted in his Real Money column to kick off the week.
So it's relevant to suggest what is coming in the report and what could be the key catalysts on each end.
Alphabet's positioning late in earnings season could be one such catalyst, as the expectations for the company has been notably lowered by the likes of Apple.
Wall Street anticipates the company to report quarterly earnings of $10.86 per share on Monday evening, which represents a decline from the reported $13.26 in the third quarter of 2018, and revenues are expected to be $38.9 billion.
"Given Google's scale and with the perceived low likelihood of upside surprise on Websites growth, coupled with an ongoing appetite to underwrite longer duration opportunities outside advertising, investors often ask us what will get GOOGL shares moving in 2019," Credit Suisse analyst Stephen Ju wrote.
He explained that the low expectations of an upside surprise obscure a view of a well-diversified, well-positioned company that should continue to beat the market in 2019.
Ju noted that the free cash flow position of the company supports his view on investment and an upward bias to websites growth due to the ongoing adoption of Smart Bidding, a Google program aimed at improving ROI for advertisers, should sustain the company's key ad revenue.
"We maintain our Outperform rating as we expect these aforementioned developments to serve as validation of our investment thesis which remain rooted in ongoing monetization improvements in Search through product updates, larger-than-expected contribution from Google's larger non-Search businesses, [and] optionality for value creation from new monetization initiatives such as Maps as well as the eventual commercialization of Google's Other Bets (Waymo, Life Sciences)," added Ju.
The company's continued "moonshots" at efforts like self driving cars through Waymo add to bullishness if such projects can take off.
Many picked up on the cash on hand for the company, expecting big plans for the company as it seeks to stoke further stock growth.
Jefferies analyst Brent Thill anticipated a strong buyback announcement to come on Monday.
"We believe GOOGL could soon announce a sharply higher stock buyback authorization of $12-15Bn - up from $8.6Bn in Jan. '18," he speculated. "Over the last 4 years, net cash & investments increased 94% to $115Bn as heavy cash spend (capex $51Bn, buybacks $17Bn, though M&A only $3Bn) did not keep up with even larger operating cash flows of $135Bn. GOOGL remains a top large cap pick with valuation merely inline with S&P500 despite >2x '19 rev growth and >2x EBITDA margins."
The company's coffers have grown by over $100 billion in the past 10 years, which has promoted a strong buyback program begun in 2015.
Given the cash horde, Thill mused about M&A activity as well: "We believe M&A could pick up if target valuations pull back due to an economic slowdown, to bolster Google Cloud Platform, especially if new Cloud CEO Thomas Kurian can re-direct the agenda; and to fuel other attractive "call options" businesses, i.e., Waymo, healthcare, hardware, even YouTube."
Real Money Pro's Doug Kass has speculated that Twitter (TWTR) could offer opportunity after the closure of Google Plus late last year and added that Square (SQ) remains a top target for a payment pick-up for the company as well.
@realmoney Why $TWTR Twitter is my largest long and why I believe there is a 40% chance that Alphabet $GOOGL acquires it at $50 in the next twelve months.@jimcramer @davidfaber @andrewsirjub
— Douglas Kass (@DougKass) September 24, 2018
Competition, Regulation Curb Outlook
That said, some analysts were worried that the company's business model is being eroded by its former customers turning away from the platform.
BMO Capital Markets analyst Daniel Salmon stated that investors need to be cautious on the stock due to macro and competition risks.
"We are slightly lowering our Google properties revenue estimates due to estimated market share losses to Amazon (AMZN) and our view that Walmart's (WMT) exit from Shopping Actions is a negative vs. AMZN too," he said. "While not necessarily a zero-sum game, we maintain the growth of AMZN's advertising business presents a headwind to GOOGL's ad revenue growth. Additionally, we believe consensus margin estimates are too high and do not accurately reflect the growth of lower margin products. As a result of both factors, we believe upside in GOOGL shares could be limited and remain Market Perform."
Salmon added that the company has persistent regulatory risks to its business model, both domestically and internationally.
Most notably, the company has been fined billions by the European Union for infringements on the political entity's General Data Protection Regulation, resulting in a $5 billion charge from the European commission in the summer of 2018.
Fine of €4,34 bn to @Google for 3 types of illegal restrictions on the use of Android. In this way it has cemented the dominance of its search engine. Denying rivals a chance to innovate and compete on the merits. It's illegal under EU antitrust rules. @Google now has to stop it— Margrethe Vestager (@vestager) July 18, 2018
The company most recently received a $57.2 million fine from the Commission nationale de l'informatique et des libertés (CNIL) at the close of January, bringing into view the persistence of penalty impositions.
Further, Google sources 53% of its revenue from outside the U.S., adding to anxiety on action from foreign regulators.
Salmon set his price target at $1,135 as a result of the risks present.
Nonetheless, the analyst consensus remains positive on the Google-parent, as analysts collectively set a "Buy" rating with a $1346.19 price target, suggesting an over $200 upside to the stock.
For more on what to expect from the post-market earnings report, see Eric Jhonsa's 5 key takeaways.