Alphabet Q3 earnings preview: Where next for GOOGL stock?

When will Alphabet release Q3 earnings?

Alphabet will release third quarter earnings after US markets close on Tuesday October 25. A conference call will be held at 1400 PT.

Alphabet Q3 earnings consensus

Wall Street forecasts Alphabet will report an 8.8% year-on-year rise in revenue in the third quarter to $70.86 billion and that diluted EPS will fall 3.9% to $1.25.

Alphabet Q3 earnings preview

Alphabet is not immune to the slowdown in demand for online advertising as businesses scale back their budgets, although it is expected to prove far more resilient than the likes of social media companies thanks to its monopoly over internet search and the popularity of YouTube. It is also less impacted than companies like Meta by the IDFA changes introduced by Apple last year, which has made it far more difficult for platforms to target consumers and track their online behaviour.

Still, revenue is expected to grow at its slowest pace in over two years. Alphabet has been delivering strong double-digit topline growth since bouncing back from pandemic-induced disruption back in the second quarter of 2020 but it is now stalling, and markets believe this will slow even further in the fourth quarter.

It is worth noting the strong dollar will be a headwind, with revenue set to rise 14% at constant currency in the third quarter. Alphabet is also continuing to face tough comparatives from last year when revenue jumped over 40% as it reaped rewards during the pandemic.

We can see that Alphabet is expected to deliver revenue growth across the board, although Search and Google Cloud are expected to provide the most momentum in the third quarter:

(Source: Q3 2022 estimates are from Bloomberg)

Meanwhile, earnings are set to decline for a second consecutive quarter as rising costs squeeze margins. Its margin is expected to have held broadly flat from the previous quarter at around 28%, but this time last year it stood at over 32%. Costs continue to rise at a faster pace than sales, with operating expenses estimated to rise 18% from last year to $51.9 billion this quarter. The result is expected to be a 5.8% drop in operating income to $19.8 billion.

Alphabet CEO Sundar Pichai told employees not that long ago that the company is not immune to the challenging economic environment and would ‘need to be more entrepreneurial, working with greater urgency sharper focus, and more hunger than we’ve shown on sunnier days’ earlier this year. Media reports have also suggested the company has pressed pause on some hiring, although its headcount is expected to have continued to rise this quarter and have ended September at 177,800. That has ballooned from just 150,000 a year ago and just 114,000 before the pandemic hit.

Rising costs and slower growth is forecast to see its core advertising unit report a 3.4% drop in profit to $23.15 billion - and this will be further dragged down by its variety of investments ranging from self-driving firm Waymo to its mysterious R&D unit X Development, with its ‘Other Bets’ section forecast to hit its bottom-line by $1.3 billion this quarter.

Meanwhile, Google Cloud also continues to weigh on the bottom-line even if it is aiding the top. Google Cloud is expected to lower operating income by over $650 million this quarter, whereas its larger rivals are both set to see profits boosted by their larger cloud computing operations:

(Source: Bloomberg)

That places Alphabet in a bit of a situation. Advertising is what makes all the profit but is suffering from the most severe slowdown in years, while Google Cloud is propelling the topline even as the economic climate becomes more challenging but is still in the red. That could put profitability under further strain if it persists.

Alphabet has refrained from providing much in terms of guidance amid the uncertain outlook, but Wall Street currently expects the fourth quarter to be even tougher than the third, pencilling-in revenue growth of just 5% and another, albeit milder, drop in earnings.

Where next for GOOGL stock?

Alphabet shares have rebounded 3.5% since hitting their lowest level in almost 34 months on October 13.

The stock has tried but failed to gain higher ground during the past three sessions and a break above $104, marking the lows seen back in both May and July, is the first upside target that needs to recaptured. Any momentum from here would allow it to recapture all three moving averages before looking to return to the 200-day moving average at around $120, in-line with the ceiling we saw in May and July.  The 48 brokers that cover the stock see even greater upside potential with an average target price of $140.

On the downside, the stock is currently testing the $99.80 level of support we saw in the first quarter of 2021, although this has not provided support in recent months. We could see the stock drift back toward the $95.60 ceiling seen back in January 2021 if it comes under renewed pressure and any drop below here opens the door to $91.30.

Take advantage of extended hours trading

Alphabet will release earnings after US markets close and this means most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and-post-market sessions.

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