Any Weakness In Alphabet’s Q3 Earnings? That’s A Buying Opportunity

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  • Reports Thursday, October 25, after the market close
  • Revenue Expectation: $34.04B
  • EPS: $10.4

In a market where nothing looks attractive after a month of extreme volatility, especially in the tech sector, it’s tough to focus on individual stocks. But if you’re investing for the long-term, there are still appealing opportunities, particularly after the recent sell-off.

Any Weakness In Alphabet's Q3 Earnings? That's A Buying Opportunity

Weekly GOOGL Chart: November 2017-Present

Alphabet (NASDAQ:GOOGL), Google’s parent company is surely one of them. Hurt by the negative macro environment, data privacy concerns, and political scrutiny, Google shares have lost their momentum since the company’s second quarter earnings report. Trading at almost $1,115 as of yesterday’s close, Google shares are down about 14% from their record high of $1,291.44 in July.

Without question Alphabet is one of our premier buy recommendations, particularly during a market pullback. Indeed, we believe investors are selling this tech giant for all the wrong reasons.

You can count on one hand the number of companies that bring in more than $100 billion in annual sales and produce double-digit revenue growth each year. Alphabet has been doing this for at least two years.

In the second quarter, Alphabet posted a 25% jump in net revenue from the same period a year ago. That was the fastest rate of revenue growth for the internet advertising services behemoth in four years. We believe Google is in a strong position to deliver a similar performance this quarter and post growth that’s greater than 20% when it reports its third quarter numbers on Thursday.

Analysts, on average, expect 22% revenue growth, to $27.3 billion, driven primarily by the company’s digital ad business, on adjusted earnings per share of $10.4.

Expanding Beyond The Ad Business

If concern for Alphabet’s reliance on the core ad business is keeping you on the sidelines, then take note of how quickly the company’s “other revenue” segment is growing. In the second quarter, that category jumped 37%, making it Google’s fastest growing line item.

Google Cloud, hardware, and Google Play, along with the company’s self-driving vehicle unit, Waymo, are the future growth engines for the company. Each will bring much needed diversification to Google’s sales. While Waymo is just in its infancy, it’s still a major leader in the autonomous driving segment. Morgan Stanley recently assigned Waymo a valuation of $175 billion.

We also like Alphabet because of its strong economic moat. We don’t see a single competitor that’s posing a serious challenge to Google dominance in the digital ad arena.

This year Google has been under pressure, on concerns that the new privacy laws introduced by the European Union in May would hurt its advertising business. So far, however, these changes haven’t impacted the company’s bottom line and we believe that threat is mainly out of the way. Its Q3 earnings report will give us a clearer idea of developments on that front.

From a valuation perspective, Alphabet also looks cheaper than its peers. It trades at 47 times trailing earnings, below Microsoft’s (NASDAQ:MSFT) 51 times and Amazon’s (NASDAQ:AMZN) 140 times valuation.

Bottom Line

Going into its the third quarter earnings report, Alphabet shares may appear to be vulnerable to market volatility and the negative macro backdrop. Still, fundamentally, there is nothing wrong with the company’s current growth drivers and its future potential. For long term investors, any weakness in share pricing should be taken as a buying opportunity.

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