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The Keys Into Alphabet Q1 Earnings -- ICYMI

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Alphabet  (GOOGL) - Get Free Reportreports earnings Tuesday after the closing bell. The global advertising business may see a larger hit from the recession than many expect, and the stock may be vulnerable to a disappointing earnings report. 

Alphabet shares are up 5.6% since April 9, the start of the S&P 500’s near stall at its current level. The index is now up about 1.6% since the date. Investors looked past what will be a rough 2020, optimistic that the coronavirus induced recession will end soon and that an earnings rebound will begin in the back of 2020. 

For the year, the S&P 500 is down 11% while Alphabet is down just 4.8%. 

Alphabet, along with other internet companies with revenue streams tethered to advertising spending, has seen some downward estimate revisions for several quarters in 2020. The logic behind the revisions: If brands are seeing reduced revenue while people stay inside and aren’t spending on discretionary items, those companies will spend less on advertising. 

Alphabet does have a diverse base of advertisers and other businesses, but the stock has almost recovered to its pre-virus level. And it’s trading at just under 28 times next year’s earnings, low historically, but richer than the roughly 23 times it has traded at in the last few years. Alphabet’s growth drivers have been unimpressive as the shift to digital advertising and away from traditional has begun to mature, although it isn’t finished.

Analysts polled by FactSet are looking for revenue for the first quarter of $40.95 billion and earnings per share of $10.68. That’s revenue and earnings growth of roughly 12% year-over-year, for both lines. Of course Q2 may show much more troublesome numbers, as is the case for most companies, as the second quarter is much more representative of the time period when lockdowns were in full swing. 

But "Based on intra-quarter data points and our analysis, we believe Street estimates for Q1 are likely optimistic, given the material pullback in ad spend due to COVID-19,” wrote RBC Capital Markets analyst Mark Mahaney in a note. "Management commentary on near-term Ad Revenue outlook will be key: we project down 20% year-over-year in Q2.” 

Mahaney is looking for revenue in Q1 and Q2 of $39 billion and $31.1 billion, against The Street’s Q2 forecast of $39 billion. Most analysts see revenue and earnings per share contracting harshly in the second quarter. 

But Alphabet may have an opportunity to prove investors that it can keep growth rates stable near-term and through the recession, as well as for the longer-term. Several quarters ago, Alphabet ’s cloud revenue beat estimates handily. Alphabet ’s “other revenue” is currently about 17% of its total revenue and about $6.8 billion this quarter. Most of that revenue is from cloud services. 

Most analysts pay far more attention to Alphabet ’s core business, but Wedbush Securities analyst Dan Ives, who covers Microsoft and other cloud players, told TheStreet that Alphabet ’s cloud business has been picking up steam and taking some market share

The point: Alphabet has a chance to show highly optimistic investors something impressive, but the stock has been a market leader into earnings. 

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