Michael Kramer and the clients of Mott Capital own GOOGL, AAPL, MSFT
Alphabet Inc. (GOOGL), the parent of the search engine Google, has seen its stock skyrocket higher to start 2020. The shares have already risen by more than 10%, helping its market capitalization to cross the $1 trillion barrier, joining Apple Inc. (AAPL) and Microsoft Corp. (MSFT). Now, the next big hurdle for the company will come on February 3, with the release of its fourth quarter and full-year 2019 results.
Since reporting its third quarter results at the end of October, shares have skyrocketed, rising by almost 15%, creating an additional $130 billion in market value. It seems that after the stock’s initial decline and investors having the time to digest the results, perceptions about the quarter improved, which have helped in propelling the stock higher.
Price vs. Market Cap
Strong Revenue Growth
Analysts do not expect the fourth quarter to be strong from an earnings standpoint. Currently, estimates show the company will earn a profit of $12.65 per share, which is down about 1% from the same quarter a year ago. However, revenue growth is forecast to be very strong rising by around 19.3% to $46.85 billion.
A New Focus?
Perhaps Alphabet’s earnings and its growth rate are no longer a useful metric to track or judge the company’s success. In recent quarters Alphabet’s earnings per share have been heavily influenced by non-operating items. For example, in the third quarter results, the company missed analysts’ estimates due to a decline in other income, with a $1.5 billion drop in its equity portfolio. But in the second quarter, the company posted a massive EPS beat due to a gain in its equity portfolio of $2.7 billion.
A better metric may be operating income, which has rebounded substantially in recent quarters, and it is likely not a coincidence that the stock price has finally broken out of a nearly two-year-long period of consolidation at the same time. Since falling in the fourth quarter of 2018 to $8.2 billion, operating income has rebounded by around 12% to $9.2 billion in the third quarter of 2019.
Alphabet operating income
Another area of focus for investors may come from its cloud unit. The company reported in its second-quarter 2019 conference call, that the business unit was operating at an annual revenue run-rate of $8 billion. That means the business unit nearly doubled in size from a $4 billion per year run rate in the fourth quarter of 2017.
Looking To The Future
When looking to the first quarter of 2020, analysts currently estimate that earnings will grow to $12.09 per share, up from $11.90 per share excluding a $1.7 billion EU fine in the first quarter of 2019. Meanwhile, revenue is forecast to rise by 18.9% to $43.2 billion versus revenue of $36.34 billion a year earlier. Meanwhile, for the full-year of 2020, analysts do see faster growth for the company, with earnings expected to climb by around 11.2% to $53.91 per share, up from an estimated $48.48 per share for full-year 2019. That is slightly faster than the earnings growth rate of 10.9% Alphabet is expected to post for 2019. Also, revenue is forecast to climb by roughly 17.9% to $190.1 billion from an estimated $162.7 billion in 2019. That is a slightly slower growth rate than the 18.9% analysts estimate for 2019.
EPS and Revenue Estimates
No Surprises On The Horizon?
The options market is not pricing in much volatility for the stock following results, based on the February 21, $1,480 strike price. The long straddle strategy, which is the purchase of one put and one call for the same expiration date and the same strike price, indicates that the stock may rise or fall by as much as 5.7%. It would place the equity in a trading range of $1,395 to $1,564 following results.
The lack of anticipated volatility in the stock following results may suggest that investors are not looking for any surprises when the company reports results on February 3. Or that perhaps there are expectations for the current operating trends of the past few quarters to continue.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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