Alphabet Inc. (GOOGL) could accelerate its path toward becoming a $1 trillion market cap club member with its earnings release after the market close on Monday.
After Microsoft Corp. (MSFT) topped $1 trillion in market cap on earnings earlier this month, there are now three companies to have touched the rarefied air above the $1 trillion mark, with Apple Inc. (AAPL) and Amazon.com Inc. (AMZN) first exceeding that lofty valuation.
Alphabet remains about $100 billion out of striking distance, but with some analysts setting price targets near $1,500 per share it would appear that adding a fourth member to the $1 trillion club could be in the cards, with first-quarter earnings coming as a key catalyst.
Earnings Expectations
The bar is certainly set high for Alphabet headed into its release, especially after a strong 22% run for the stock year to date.
The consensus on Wall Street for the release stands at earnings per share of $10.53, which would be up 6% year over year, and revenue of $37.32 billion, a nearly 20% leap from the prior year.
Considering the company's already massive revenue base, such a juup would be remarkable.
Amazon Effect on Alphabet
Some analysts are worried the price targets simply may be set too high for such a large company.
"We see Alphabet as a core holding and believe it can continue to grow revenue 15-20% over the mid-term," BMO Capital Markets analyst Daniel Salmon advised clients. "But we believe the Street underestimates margin erosion from negative mix-shift and believe the rise of Amazon's advertising business presents a headwind."
Amazon has stepped up efforts in advertising on its platforms as of late and its direct tie-in to consumer spending makes it a formidable competitor for advertisers' pocketbooks, while Facebook Inc. (FB) also comes in as a key rival due to its massive reach.
"We expect Amazon to benefit from its superior relevance to everyday shopping experiences, and Facebook to benefit from its best-in-class data collection and targeting efforts made available to advertisers of all sizes, which should provide both companies with favorable worldwide retail market share shift at Alphabet's expense," Wedbush analyst Dan Ives said.
The more-crowded Internet advertising space has forced Alphabet to focus efforts on cloud projects, YouTube, and hardware among its numerous other endeavors. The issue with these efforts is that they are costly and often come with lower margins than the flagship advertising business.
Still, the long-term growth profile remains attractive given the sheer number of bets the company controls and the still-strong core that the Sundar Pichai-stewarded search giant maintains.
"Alphabet's unrivaled collection of high-profile and omnipresent core products and platforms, quarterly results, and its opportunity for sustained growth in future years" are big positives for the company, Webbush's Ives concluded, standing by an "Outperform" rating on the stock.
Facebook's strong ad growth could also assuage some concerns about advertiser spending as strong overall indications on advertiser expenditures generally bode well for Alphabet, too.
More Mitigating Factors
Alphabet also has new overhangs for investors to monitor, foremost among being the Other Income and Expenses (OI&E) line that will be broken out for the first time on Monday.
"Alphabet will recognize the $1.7B European Commission fine in 1Q results, but our GAAP EPS of $10.23, and likely consensus $10.38 does not," J.P. Morgan analyst Doug Anmuth noted. "Our GAAP EPS including the fine would be $7.81. Furthermore, GAAP EPS could have other noises incl. the unrealized gains/losses from equity investments, recognized in OI&E, & the associated performance fees."
Monday's earnings release will realign the company's reporting, replacing general and administrative expenses. The new line will notably include disclosed stakes of around 5% each in ridesharing companies Lyft (LYFT) and Uber.
"We expect volatility in Google's OI&E to remain elevated as gains and losses associated with movements in Uber and Lyft share prices are recorded there," BMO Capital Markets' Salmon said.
Most notably for the first-quarter results, the line will include a $1.7 billion fine levied by the European Commission for violation of antitrust laws.
"Google has cemented its dominance in online search adverts and shielded itself from competitive pressure by imposing anti-competitive contractual restrictions on third-party websites," Commissioner Margrethe Vestager said. "The misconduct lasted over 10 years and denied other companies the possibility to compete on the merits and to innovate -- and consumers the benefits of competition."
The nearly $2 billion charge will sting results and possibly spook investors not cognizant of the charge.
Further, the company's apparent unwillingness to meet the demands of regulators could come back to haunt it.
"On the domestic front the company has been asked to appear in front of Congress multiple times to provide testimony," SunTrust Robinson Humphrey analyst Youssef Squali noted. "While we have not seen material weakness in the company's operations beyond the financial impact of the fines, we believe there are certain business practices that will require change to be in compliance going forward that could impact the company."
Growth Engines Beyond the Search Engine
For longer-term investors, the earnings may merely be a stepping stone as the company's efforts outside of search hold the key to touching the $1 trillion market cap mark.
While the company has made its name being a directory for the Internet, its ancillary efforts that include endeavors in artificial intelligence (AI), autonomous driving, healthcare, cloud and drone technology are offering untapped opportunity in the view of many stock watchers.
"We expect more robust contributions from the non-search businesses to rise to sustain revenue growth, even as core search continues to decelerate," Credit Suisse analyst Stephen Ju said.
Ju cited YouTube advertiser growth, cloud, Maps, Google Play, and hardware sales among the key factors that should mitigate any loss of market share in ads from rivals such as Facebook and Amazon.
"Our advertiser checks continue to return very consistent feedback with search budget growth decelerating at a modest pace while YouTube budget allocations seem unimpeded by the user commentary controversy mid-1Q," he said.
Ju maintained an "Outperform" rating for the stock and set his price target at $1,400 per share.
However, Ju noted that this target could be raised if certain major investment areas, such as Alphabet's Verily life sciences initiative or Waymo, the company's self-driving program, can pay off.
He isn't alone in that thinking.
"We believe Alphabet's willingness to invest in new areas, knowing most will fail, is a recipe for long-term success as while most "Moonshot Factory" projects may fail, every once in a while, you end up with a Waymo, perhaps the division's, most successful graduate to date," the Action Alerts PLUS team pointed out. "We believe that Alphabet's free cash flow generation and solid balance sheet set it apart and are what will allow the company to continue taking chances on far-out ground-breaking and potentially world changing projects."
Considering Jefferies recently estimated that Waymo could be worth $250 billion, it does not take many wins among these "moonshots" to make the investment worthwhile.
"We expect 25% revenue growth in 1Q [from other bets]," Ju said. "Longer term, we remain most optimistic about the commercial prospects for Waymo."
A description of the strides made thus far in these potentially massively profitable investments may prove pivotal to a stock pop on earnings.
Earnings are due to be released after market close on Monday with an earnings call to follow at 4:30 p.m. Tune in here.
(Alphabet, Amazon, Facebook, and Microsoft are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GOOGL, AMZN, FB or MSFT? Learn more now.)
