Shares of Google parent Alphabet (GOOG , GOOGL) which have risen 36% in six months and 47% year to date, compared with 16% rise in the S&P 500 index, have outperformed their FAANG peers over the past six months. Ahead of the company’s second quarter fiscal 2021 earnings results Tuesday, investors will want to know if Google's gains are sustainable.
The stock gains have been driven by the tech giant’s cyclical recovery in its advertising business. This was noticeable last quarter when the company delivered an impressive 34% jump in Q1 revenue. The market has seemingly re-priced the stock based on the company’s growth resurgence. But while the the increase multiple seems justified, the stock is no longer cheap. That said, Google’s recent uptrend in several verticals including online advertising, particularly in areas such as retail, financial services and travel remain compelling reasons to bet on higher prices.
These were some of the points made last week by analysts at Credit Suisse which assigned Google a new Street-high price target of $3,350, implying potential upside of almost 30%. "Nearly all advertising sectors are on pace to exceed our expectations" in Q2, noted Credit Suisse, adding that ad recovery in digital ads in post-pandemic world is set to bring bright spot on Tuesday. Not to mention the improvements the company has made in its Cloud business. Sustained improvement in these areas will determine whether the stock can maintain its uptrend or if it’s time to take profits.
For the quarter that ended June, Wall Street is looking for the Mountain View, Calif.-based tech giant earn $15.69 per share on revenue of $51.49 billion. This compares to the year-ago quarter when earnings came to $9.87 per share on revenue of $41.16 billion. For the full year, ending in December, earnings are expected to rise 49% year over year to $87.33 per share, while full-year revenue of the $236.73 billion would rise 30% year over year.
Improved digital ads from e-commerce and a recovery in travel and entertainment, which is expected to rise by high double digits, have already begun, evidenced by the strong earnings results just released from Snap (SNAP). Aside from a raised forecast for global Internet advertising for fiscal 2021, analysts have also cited an uptrend in auto and consumer products, which are expected to rise some 20%. These trends bode well for Google, given that Internet advertising accounted for near 60% global advertising in 2020.
In the first quarter, the company delivered blowout results, driven by its core search advertising business and better-than-expected profit margins. First quarter revenues surged impressively at a 34% clip, reaching $55.3 billion, easily beating analysts' estimates. The revenue gains were driven by, among others, Search (up 30.1%), YouTube (up 48.7%) and Google Network (up 30.2%) which benefited from a rebound in consumer and business activity. Q1 operating income more-than doubled to $16.4 billion, thanks to 30% jump in operating margin.
Investors were also excited about the potential of Google Cloud revenue which rose 45.7% to $4 billion in Q1. Notably, Google Cloud still accounts for just under 7% of Alphabet's revenues, meaning more meaningful growth could be underway. On Tuesday, beyond the strong growth in ad revenue and guidance for 2021, the market will want to see sustained improvement in the cloud business to assess at which point the cloud can realistically become a more compelling narrative for Google stock.
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