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Alphabet is starting to slip

The parent of Google is experiencing higher revenues, but the average price of mobile advertising is less than that of desktop adverts.

Google
Source: Bloomberg

Alphabet will announce its fourth-quarter results on 1 February, and traders are expecting revenue of $17.08 billion and earnings per share of $8.11. The company’s third-quarter revenue and EPS was $15.1 billion and $7.35 respectively. The company will reveal its full-year numbers on the same date, and investors are anticipating revenue of $61.32 billion and EPS of $28.99, these forecasts equate to a 16.8% rise in revenue and a 13.3% jump in EPS.

Alphabet is keeping shareholders onside with higher revenues and net income, and shareholders welcomed the $5 billion share buyback. However, returning cash to shareholders in the form of a dividend or a share buyback isn’t a major priority for the firm at the moment, as excess funds will be poured into achieving revenue growth.

The company stated that mobile searches exceeded that of those carried out on desktops. The shift towards mobile activity has led to a jump in the click rate on adverts owned by Google, but average price of mobile and video advertising is below that of the desktop promoting.

High valuation

  Trailing 12M price/earnings Forward 12M price/earnings Price/book value Dividend yield
Alphabet (A line) 34.91 25.71 4.41 0.0%
Facebook 99.39 45.43 6.71 0.0%
Netflix 357.21 210.25 19.52 0.0%
Amazon 870.81 111.17 22.67 0.0%
NASDAQ 100 21.51 17.38 4.26 1.26%

 

Alphabet has a high valuation when compared with the broader tech market, but the big names of the industry have much higher valuations, going on the trailing price/earnings ratio. The forward-looking price/earnings for Alphabet points to an increase in future earnings. Alphabet is the only stock of the bunch that even comes close to having a similar price to book value to that of the NASDAQ 100, but both have pricey valuations.

Investors in Alphabet are pursuing the possibility of high capital growth, and the absence of a dividend will not sway them away from the stock.

Earnings vs estimates

Out of the past eight quarterly reporting seasons, Alphabet has only exceeded the revenue estimates twice – the last two announcements. On the EPS front, Alphabet has a 50% track record of beating the expectations. Volatility will be anticipated after the announcement as, on average, the stock has moved 5.5% post the figures being released, and 75% of the time it has been a positive market reaction.

Shorters are tapering off

Since Alphabet revealed its third-quarter figures (22 October), the short interest on the stock dropped by 8.3%, and the share price has increased by 0.4% since then. Over the past 12 months, the number of short positions has increased by 57%, and during that timeframe the stock has rallied by 36%.

Banks are buyers

  Buy ratings Hold ratings Sell ratings
Alphabet 45 4 0
Facebook 47 4 1
Netflix 24 18 4
Amazon 41 6 0

 

Equity analysts are extremely bullish on Alphabet, with 91.8% of ratings attached to it being ‘buy’ which is highest of the group. Investment banks have a price target of $876 for Alphabet (A line) which is 18% above the current price.

Technical analysis from Joshua Mahony MSTA, Market Analyst at IG

The first three weeks of 2016 saw Alphabet’s stock trending lower, forming a series of lower lows and lower highs. However, with last week’s resurgence, question are being asked as to whether the bulls are set to regain control once more. That run came to an abrupt end at the $752.26 resistance level, dropping below the 200-hour simple moving average. Interestingly, this selloff failed to close below the recently reliable 100-hour SMA and swing low of $724.86.

As such, this selloff could be an extended retracement of last week’s move, an idea which is corroborated by the closed hourly candle above $736.60. It is worth noting that a close below $722.47 will bring the support at $701.60 and $687.92 (2016 low) into play. However, today’s close above $736.60 provides us with a bullish outlook for now, with $752.26 and $769.07 the next major resistance levels to reach. 

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