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Alphabet earnings preview: Lower Google ad sales

Mohit Oberoi
Author: Mohit Oberoi

Last Updated: July 28, 2020
Alphabet chief executive Sundar Pichai

Google-parent Alphabet will post its second-quarter earnings on Thursday, with investors aware that the group has been the worst performing stock in the FAANG (Facebook, Amazon, Apple Netflix, Google) pack this year.

Analysts expect Alphabet, led by chief executive Sundar Pichai (pictured), to report revenues of $37.37bn in the second quarter, down 4% from $38.9bn in the corresponding quarter in 2019. Its earnings per share is expected to be $8.23 in the second quarter as compared to $14.21 in the same quarter in 2019.

“I don’t even know what a good quarter from Alphabet would look like anymore, though neither does anybody else,” said Jim Cramer, host of CNBC’s Mad Money on Monday.

Alphabet stock is up only 14.2% year to date, underperforming the FAANG stocks as well as the Nasdaq 100 Index that’s up 17.4% over the period. One reason Alphabet stock is underperforming is due to falling advertisement rates.

During their second-quarter earnings call, Microsoft’s chief financial officer Amy Hood said: “In our search business, though rates stabilized through the quarter, we saw a continued reduction in advertising spend on our platform.”

For Microsoft, advertisement revenues form a small part of the overall revenues. However, things are different for Alphabet, and in the first quarter of 2020 almost 82% of its revenues came from advertisements.

Alphabet warns of ‘difficult’ quarter

Ruth Porat, Alphabet’s chief financial officer also talked about the advertisement business during the company’s first-quarter earnings call.

She said: “At the inception of the crisis, the increase in user interest was for information about COVID-19 and related, non-commercial topics. Although we have seen some very early signs of recovery in commercial search behavior by users, it is not clear how durable or monetizable this behavior will be.”

She added: “As of today, we anticipate that the second quarter will be a difficult one for our advertising business. As we move beyond the crisis and the global economy normalizes, this should be reflected in our advertising revenues, but it would be premature to comment on timing given all the variables here.”

Meanwhile, while Alphabet stock has underperformed its peers in the tech sector this year, some analysts see better days ahead. Earlier this month, Matt Maley, chief market strategist at Miller Tabak said that he is bullish on Alphabet after its recent underperformance.

On Tuesday, Deutsche Bank raised its target price on Alphabet from $1,700 to $1,975 which would imply an upside of 24% over yesterday’s closing prices. Alphabet has a mean consensus price target of $1,620 that implies an upside of almost 6%.

Out of the 36 analysts polled by Thomson Reuters, 12 have a “strong buy” rating on Alphabet while 20 have given it a “buy” rating. The remaining four analysts have a “hold” rating on the stock.

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Mohit Oberoi

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.