Michael Kramer and the clients of Mott Capital own GOOGL
The shares of Alphabet Inc. (GOOG, GOOGL), the parent of the search engine Google, are jumping following its first quarter results. While earnings did disappoint, revenue was stronger than expected. That is helping to lift the shares in the after-hours trading session on April 28. It may only be the start.
For the quarter revenue was almost 2.5% better than analysts' estimates, coming in at approximately $41.16 billion. Meanwhile, earnings per share came in more than 8% below estimates at $9.87. To know surprise, the company did take a hit in its non-operating income from its equity portfolio, given the stock market volatility in the first quarter, which may have made the difference versus analysts estimates.
Alphabet's first quarter earnings and revenue estimates.
The Shares Are Jumping
Still, the stock is jumping sharply in the after-hours rising above a critical level of technical resistance around $1,300 that has plagued the equity for weeks. It is a significant level of resistance, as it had served as the stock's previous high, before its big fourth quarter 2019 run-up. The equity may be able to run to around $1,365, which would be the next critical level of resistance, about 10% higher than its closing price of roughly $1,232 on April 28.
Technical chart
The Stock’s Valuation Is Compelling
A sharp move higher may be justified by Alphabet's P/E ratio. One could easily argue that the shares may be undervalued trading for 23.5 times one-year forward earnings estimates of $54.31. Since 2017, the stock has traded with a one-year forward P/E ratio in a range of 17 to 26. It leaves the shares currently trading in the middle of that range. Before today's results, analysts had forecast earnings to fall by about 15.8% in 2020 to $44.12 per share. Meanwhile, forecasts were for revenue to grow by about 2.7% to around $166.2 billion. Given the better than expected revenue growth and expectations for the company to cut costs, those revenue and earnings estimates are likely to rise for 2020 and 2021, helping to support that valuation.
One-year forward P/E ratio
Growth Drivers
YouTube will likely be one of those long-term growth drivers for the company; the business unit saw its revenue jump by over 33% to just over $4 billion. Also, its Cloud unit grew by 52% to approximately $2.8 billion. The company did note on the conference call that it expects to reduce expenses and capital expenditures throughout 2020.
Narrowly Misses Estimates
One reason why the company may have missed analysts' earnings estimates may have been the stock market volatility. The company had a loss of $814 million from its equity holdings. That, along with a $6 million performance fee reversal, reduced taxes by $170 million, net income by $638 million, and earnings per share by $0.92.
Risks Remain
Overall, with the stock rising in the after-hours back over $1,300, it would seem that investors are breathing a sigh of relief. The company still offers an outstanding growth proposition over the long-term at what could be viewed as a reasonable valuation given that long-term opportunity. Should the company be able to come out of this period relatively unscathed, then it seems it's future may be healthier than what it was before the coronavirus hit.
Still, it won't be easy for the shares given a very volatile stock market. Should the shares fail to get over resistance at $1,300, they could quickly reverse and move lower back towards support at a price of around $1,150. To be sure, for the stock to sustain any long-term momentum, Alphabet will need to keep putting up better than expected results.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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