Google is well positioned to beat on earnings estimates when it reports its second quarter results Thursday afternoon, according to one Google bull. Google shares have risen 7.9% year-to-date, while other FAANG stocks have risen more than 20% in some cases. The S&P 500 is up 19% in 2019.
Google has "a slightly greater chance of upside on the bottom line" than downside, RBC Capital Markets analyst Mark Mahaney wrote in an note.
Here's what would drive that.
Costs and Headcount
Google can beat estimates on earnings and cash flow "assuming a slowdown in headcount ads and in capex spend, as the company has forecast," Mahaney said.
Higher-than-expected costs related to headcount and research and development prompted several analysts to lower their operating income forecasts and price targets in February. Google's operating margin fell in that quarter to 21% from 24% in the same quarter the prior. Analysts are now looking for an operating margin of roughly 21% for the full year of 2019, according to FactSet.
But an optimistic Mahaney said "We are also looking for $10.50B in Core Google GAAP Operating Profit (27.8% margin, which would indicate flattish Y/Y margins, with the slowdown in employee adds one positive factor)."
Look for those cost controls in the earnings print.
Google doesn't report YouTube revenue and most people don't talk much about it, but Mahaney's algebra brings him to a 2018 revenue estimate of roughly $20 billion for YouTube. This is "positioning Google extremely well for the strong growth in Video Advertising."
Google shares have trailed the market for a reason, and they also trade at a historically low forward one-year price-to-earnings ratio of 21. Some might think Google is ripe for a buy, and maybe it is, but that multiple does reflect that investors might like to see the company find some new growth drivers.
Even a bullish Mahaney only cites incrementally growing search market share, a strong video ad business, and "an impressive track record of innovation and acquisition" as core drivers of his price target. He values Google at $1,300 a share, representing 14% upside. Explosively growing secular trends like driverless cars and cloud computing are not yet areas of strength for Google. Google's Waymo hasn't grown yet, and its cloud computing business is far behind Microsoft'S (MSFT - Get Report) and Amazon'S (AMZN - Get Report) .