- Alphabet is set to release its third quarter earnings after the bell on Thursday, and investors will have their eyes set on both its online advertising business and continued growth in its Google Cloud division.
- A recovery in Google’s online advertising business would be welcomed after it suffered a hit amid the COVID-19 pandemic as advertisers pulled back spend across almost all channels.
- “Third-party data points to a gradual recovery in advertising spending in 3Q,” analysts at Stifel said.
- Here’s what to expect in Alphabet’s third quarter earnings report, according to four Wall Street analysts.
- Visit Business Insider’s homepage for more stories.
Alphabet will report its third quarter earnings report after the market close on Thursday, with investor eyes focused on a potential recovery in online advertising spend.
After a slight dip in its advertising revenue in the second quarter due to the COVID-19 pandemic, analysts are expecting a return to growth in the third quarter in the mid-single digits.
“Third-party data points to a gradual recovery in advertising spending in 3Q,” analysts at Stifel said.
Investors will also be focused on the growth rate of Google Cloud, as it competes against the number one and two leaders in the space, Amazon’s AWS and Microsoft’s Azure platforms, respectively.
The earnings report comes shortly after the Department of Justice filed an antitrust lawsuit against the company. Potential commentary on the subject from Google executives will be closely monitored.
Here's what to expect in Alphabet's third quarter earnings report, according to four Wall Street analysts.
1. Goldman Sachs
Rating: Buy
Price Target: $1,990
"Our advertiser checks point to a month-over-month improvement throughout the quarter in the digital advertising market. We are modeling total Alphabet revenue of $42.7bn or +5% y/y," Goldman said.
"All in, we continue to view Alphabet as one of the best-positioned digital ad companies and expect digital advertising revenue to reaccelerate meaningfully in the back half of 2020 and 2021 as the economy recovers from pandemic related headwinds. Additionally, we see non-advertising revenue streams like Google Cloud becoming a more central part of the thesis which will also help drive meaningful gross profit contribution as the business continues to scale," Goldman added.
2. Stifel
Rating: Hold
Price Target: $1,600
"Third-party data points to a gradual recovery in advertising spending in 3Q, with digital ad spending outperforming traditional and offline mediums. While we expect the recovery to continue through the balance of the year, the environment remains challenging given the weak macro backdrop and the uncertain progression of the COVID-19 pandemic and its impact on global advertising," Stifel said.
"We are encouraged by the trends we are seeing in early 3Q data from ad agencies and other firms with broad advertising exposure. Data from the 3Q Kenshoo Analyst Preview indicates an ongoing recovery in paid search, with total paid search spending increasing 17% m/m from June to July," Stifel added.
3. JPMorgan
Rating: Overweight
Price Target: $1,770
"We are positive into 3Q earnings on ad recovery and we believe GOOGL can deliver upside to consensus revenue estimates.We recognize that certain categories Google over-indexes to—such as travel, which we think is 10-15% of search—are still heavily impacted, but our checks w/SEMs suggest search has rebounded w/online advertising more broadly, & read-throughs from SNAP & agencies are positive," JPMorgan said.
"We remain optimistic on GOOGL long-term & believe N-T expectations are modest, but beyond ad recovery we may need to see changes in margin profile, capital returns, or strategic structure to really get the shares going. Valuation remains attractive at 22.6x our 2022E GAAP EPS, & stripping out Other Bets 19.9x our 2022E Google Segment EPS," JPMorgan added.
4. RBC
Rating: Outperform
Price Target: $1,700
RBC is focused on three key items in Alphabet's upcoming earnings report:
"1) Gross Revenue and Operating Margin Trends for Core Google: We are looking for Core Google Gross Revenue of $43.41B (+8% Y/Y). We assume a near V-Shaped recovery after declining 2% Y/Y in Q2 to +15% growth (vs. Street at +10%) in Q4. We are also looking for $7.65B in Total GAAP Operating Profit (17.5% margin, down ~6.5pts Y/Y)."
"2) Gross Google Properties Revenue: Within Core Google is Google Properties Revenue, which includes core Search and YouTube. We are looking for $29.99B in Gross Google Properties Revenue (+5% Y/Y vs.-8% in Q2). We believe easing shelter in place restrictions (per our Mobility Matters series) have driven a further recovery in Online Ad Spend from the improved trajectory of Search revenues in July vs. flat Y/Y at the end of June."
"3) Revenue for Google Other: We are looking for $8.2B in Google Other Revenue, driven by 39% (vs. 43% in Q2) growth in Cloud and 22% (vs. 26% in Q2) growth in Other (Hardware, YT Subscriptions, Play)."
