Shares of Google parent Alphabet (GOOG , GOOGL), up 4% year to date, compared with 1% decline in the S&P 500 index, have outperformed their FAANG peers over the past week. Ahead of its fourth quarter fiscal 2020 earnings results Tuesday, investors want to know if the gains are sustainable.
Google’s stock gains have been driven by bullish comments from several analysts, including James Lee of Mizuho, who last week argued that the stock deserves a higher multiple given the cyclical recovery in the company’s advertising business. The analyst raised his price target on Google shares to $2,100 from $1,810, implying 10% upside, while citing an uptrend a rebound in several verticals in online advertising, particularly in areas such as retail, financial services and travel.
The analyst also noted that Google will report both higher ad demand and stronger ad pricing. Morgan Stanley also reiterated its Overweight rating and $2,050 price target. Evidenced by the strong results from Facebook (FB) there’s some cause for optimism. This is a stark departure from prior concerns about antitrust lawsuits against the company, alleging anticompetitive conduct in its search and advertising segments. There is also issues to be sorted related to Section 230, which shields tech platforms from liability associated with content posted by users.
That said, assuming Google suffers no business disruption as a result of these suits, the share price looks undervalued on a relative basis. As GDP goes higher, so will advertising demand. And Google’s extensive advantages in technology and the network effect brought on by its various platforms such as YouTube, Google Cloud, Gmail, etc., will drive growth higher. And these trends would support multiple expansion that could drive Google shares 35% higher $2500 in the next 12 to 18 months.
For the quarter that ended December, Wall Street is looking for the Mountain View, Calif.-based tech giant earn $15.98 per share on revenue of $53.11 billion. This compares to the year-ago quarter when earnings came to $15.35 per share on revenue of $46.08 billion. For the full year, earnings are expected to rise 6% year over year to $51.98 per share, while full-year revenue of the $178.71 billion would rise 10.4% year over year.
In the third quarter, the company regained its dominant form, crushing consensus revenue estimates in almost every business segment, with total revenues beating estimates by an incredible $3.3 billion. Growth drivers during the quarter were notably YouTube ad revenues which surged 32%, along with a 45% surge in Google Cloud. Combined, these segments produced over $3.4 billion worth of additional revenues.
Just as impressive, the company delivered EPS of $16.40, a sizable $5.19 beat, thanks in part to the $2.1 billion Google generated in Other income. The impressive Q3 numbers suggested that businesses were getting back to normal operations. But that was prior to rising COVID cases during the holiday period. With travel and leisure industries, among others, still devastated by lockdown restrictions, Google’s guidance may disappoint.
As such, on Tuesday investors might have to temper their expectations. While the numbers themselves might be fine (perhaps better), the stock may still pull back, which, if it does, should be seen as a buying opportunity.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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