Alphabet Q4 preview: Where next for GOOGL stock?

When will Alphabet report Q4 earnings?

Alphabet will release fourth quarter and full year earnings for 2022 after US markets close on Thursday February 2. A conference call with management will be held on the same day at 1330 PT (1630 ET).

Alphabet Q4 earnings consensus

Wall Street forecasts Alphabet will report a 1.8% year-on-year rise in revenue in the fourth quarter to $76.65 billion while diluted EPS is expected to shrink 13.5% to $1.21.

If achieved, that puts Alphabet on course to see annual revenue rise over 10% in 2022 and a 14% fall in earnings to $4.80.

Alphabet Q4 earnings preview

It could be another tough quarter for Alphabet. The company has already started to see softer demand for advertising as businesses pullback on spending in the uncertain environment and that could be coupled with slower growth from its cloud computing business. This is expected to see Alphabet report its slowest revenue growth on record in the fourth quarter.

(Source: Bloomberg)

Advertising revenue is forecast to be down 0.7% from last year. Revenue from Search is expected to be up 0.1% and countered by softer ad demand elsewhere. YouTube is expected to see sales fall 4.2% following the surprise drop we saw in the last quarter, although it is making an effort to drive the topline through its premium subscription service. Although this is worrying, investors should take some comfort that Alphabet looks far more resilient in the current climate than its social media rivals. For example, the softness in the ads market saw Alphabet’s prices knocked by around 5% in the last quarter, whereas at Meta – where it has had to grapple with a myriad of sector-specific headwinds – prices dropped by 18%.

Meanwhile, Google Cloud is forecast to deliver revenue growth of around 30% compared to last year. While impressive, this will be the seventh consecutive quarter of slower growth for the unit. Alphabet’s cloud division will be closely-watched after rival Microsoft warned that it saw a notable drop in spending from December and warned that growth will slow further in 2023.

Plus, while Google Cloud is helping prop up Alphabet’s topline, it is still deep in the red whilst its rivals Amazon and Microsoft are both reaping massive profits from their respective cloud operations. Markets don’t expect this to change anytime soon either considering Wall Street forecasts Google Cloud won’t churn out its first operating profit until 2025.

(Source: Bloomberg)

Sales growth is slowing at a time when costs are rising. Margins have been squeezed over the past two years as costs eat away at profits and grow faster than revenue. Operating costs are forecast to rise 9.8% in the fourth quarter and deliver a margin of 24.2% - the smallest margin seen in two-and-a-half years. That will lead to Alphabet’s earnings declining for a third consecutive quarter.

In response to the tougher environment, Alphabet has announced plans to layoff 12,000 workers, representing over 6% of its workforce. CEO Sundar Pichai said the company had grown rapidly in recent years ‘for a different economic reality than the one we face today.’ Alphabet’s workforce has almost doubled since the start of the pandemic, suggesting the initial round of layoffs is shallow and could be followed by more cuts if the economic environment deteriorates further in 2023.

Google is heavily reliant on its core Search operation and, with the outlook for the advertising market set to remain challenging, we may see Alphabet try to cut costs further in 2023 so it can right size the business while protecting profits and cashflow. Markets may reward those that can trim the fat to weather the storm and remerge when conditions improve now that growth is harder to come by and costs weigh on the bottom-line.

What to expect from Alphabet in 2023

Alphabet is going through one of the most challenging periods in its history, but it should be a temporary blip. Earnings are forecast to fall again in the first quarter of 2023, which may supress sentiment, but then start growing again in the second quarter before accelerating to double-digit rates in the second half of the year.

Easier comparatives from a troublesome 2022 will allow sales to grow again this year and that, twinned with market expectations that it can get a better grip on costs, should lead to the bottom-line outpacing the top in 2023. Wall Street currently believes Alphabet will report an 8% rise in annual revenue and a 9% rise in EPS this year.

Will ChatGPT challenge Google Search?

We could see confidence in Alphabet’s dominant position in the market tested in 2023 and beyond. Google currently boasts a monopoly over internet search, so much so that regulators remain busy investigating its role in the market. However, the launch of AI-driven chatbot ChatGPT has unnerved some that believe it is a sign how Google search could be leapfrogged as the next wave of technology emerges.

The New York Times described it as a ‘code red’ situation for Google and said it intends to launch an array of its own AI products in 2023, including a demo version of its own chatbot to rival ChatGPT. Other media reports have claimed Alphabet’s management has been worried about introducing its own chatbot too soon in fear of harming its reputation, but ChatGPT has certainly intensified the pressure for Google to evolve and keep ahead of the pack – especially as its rival Microsoft is emerging as a major backer of ChatGPT’s creator, OpenAI.

Where next for GOOGL stock?

Alphabet shares have found higher ground in early 2023 but have stuttered since hitting a seven-week high of $100 at the start of the week, with the downtrend that can be traced back to April 2022 coming back into play. The RSI was also on the cusp of entering overbought territory to suggest this could provide a ceiling.

A move above here would allow it to break out of the downtrend and target a move over $104 to recapture the floor seen between June and September 2022. A bigger jump toward $119.50 would be on the cards from here. The 49 brokers that cover the stock see slightly more potential upside with the average target price sat at $124.

We could see the 50-day moving average provide some support if the stock comes under renewed pressure, but the $85.50 level of support seen in late 2020 and early 2021 is still on the radar.

Take advantage of extended hours trading

Alphabet will release earnings after US markets close and 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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