Investors are expecting some big growth numbers from Alphabet Inc (Nasdaq: GOOG, GOOGL) when the tech giant reports second-quarter earnings on Monday afternoon. Analysts say revenue growth shouldn’t be a problem for GOOG stock, but gross margin could be.
Consensus Wall Street analyst estimates are calling for Alphabet earnings per Class A share of $9.59. Analysts are also expecting revenue of $32.19 billion, up 23.7 percent from a year ago.
Of course, those earnings estimates don’t include the $5 billion fine the European Union slapped on Google last week for antitrust violations related to its Android phone software.
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Canaccord Genuity analyst Michael Graham says margins are the biggest long-term concern for Alphabet stock owners. Despite impressive earnings and revenue numbers in recent quarters, GOOG stock has initially reacted negatively following three of its last four earnings reports as investors focus on rising costs and shrinking margins.
Graham says Google’s margin woes are tied to its shifting business and will likely continue. Alphabet’s gross margin has dropped from 60.4 percent in the first quarter of 2017 to 56.8 percent in the first quarter of 2018.
“The fastest growing segments that are gaining share within the overall mix have some of the lower gross margin structures,” Graham says.
Those segments include mobile search, YouTube, AdMob and DoubleClick. Graham estimates GOOG gross margin will drop by about 5 percent overall from 2017 to 2022.
Google doesn’t break down its revenue by segment, but Graham says mobile search, YouTube, and DoubleClick programmatic advertising are three of its fastest-growing revenue sources. Canaccord estimates the Mountain View, California-based tech giant will grow mobile search revenue from $40.7 billion in 2018 to $82.8 billion in 2022, a 21.9 percent compound annual growth rate. At the same time, Graham estimates YouTube revenue will grow from $17.7 billion in 2018 to $33.1 billion in 2022, a 19 percent CAGR.
Unfortunately for Alphabet earnings, Graham says shrinking margins will limit earnings upside in the years ahead and make GOOG stock the least attractive long-term investment among the FANG group.
“With significant multiple expansion from these fairly high levels unlikely, we see an outlook for stock appreciation that will likely be capped by EPS growth (which we believe will be slower than revenue growth),” Graham says.
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Canaccord has a “hold” rating and $1,050 price target for Alphabet stock.
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Alphabet Inc Earnings: What to Expect from GOOG Stock originally appeared on usnews.com
