Alphabet earnings to get another boost from digital ad rebound - Stock Market News



Google parent Alphabet was late in joining last year’s tech rally but a powerful rebound in digital ad revenue in the fourth quarter helped the stock catapult to new heights. Alphabet is expected to report another strong quarter after Tuesday’s market close on Wall Street. However, will a jump in ad revenue alone be enough to lift the stock this time round?

Ad rebound in full gear

Alphabet was one of the few Big Techs that saw its revenue plunge during the pandemic-induced economic slump as income from online advertising – its biggest revenue source – plummeted. But by the fourth quarter, the recovery was in full gear and the outlook has only gotten stronger since. The combination of vaccinations, abundance of fiscal and monetary support, and more businesses adapting to the digital age should sustain the rebound at least through 2021.

However, a full recovery cannot happen until a good degree of normality has been restored in the travel industry and that probably won’t occur until most countries globally have caught up with the vaccine leaders such as the UK and US. The travel sector makes up a large chunk of online advertisers so the damage to the industry has been a significant blow to the world of digital advertising.

Big jump in EPS is expected

Nevertheless, the advertising rebound is expected to have continued in Q1 and the consensus estimate by Refinitiv IBES is for a 24.75% year-on-year increase in ad revenue to $42.12 billion. Total revenue is projected to have risen by a healthy 26.3% rate to $52.00 billion. The estimate for earnings per share (EPS) is even more bullish at $15.82, which would represent a 60.2% y/y increase.

Alphabet stock closed at a new all-time high of $2,309.93 on Monday. A strong earnings beat could bring the $2,400 level within reach and set the bulls’ sights on the 361.8% Fibonacci extension of the September 2020 downleg, which lies at $2,574.21.

Still overvalued?

If there is a downward correction in the stock, the 50-day moving average ($2,127.89 currently) could provide some support before the price revisits the $2,000 region. Analysts have set a median price target of $2,500 and are maintaining their ‘buy’ recommendation so there is scope for sizeable gains should the earnings not disappoint.

The Company has a comparable price/earnings multiple with the rest of the tech clan, both on a trailing and forward basis. However, investors remain concerned about Alphabet’s overreliance on advertising for revenue, which accounted for about 80% of all income in Q4. Thus, there is pressure on Alphabet to deliver impressive results for its other segments as well.

Future growth drivers eyed

YouTube Premium – Alphabet’s paid streaming service – will likely be in focus as investors will want to see solid growth in subscriber numbers. The results of its cloud computing division – Google Cloud – will be under the spotlight too as the Company will report separate figures for this segment for the first time. Google Cloud enjoyed strong growth in 2020 but was still operating at a loss in the fourth quarter as the Company has been investing heavily in this business. Should those investments translate to an operating profit as early as Q1, the stock could be in line for a big bump up.

However, even if Alphabet is able to please investors with its latest earnings, there is the issue of ongoing antitrust investigations in both Europe and the United States. Until those cases have been settled, there may be a limit to how far the share price can rally.

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