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Oct. 26, 2020, 12:19 p.m. EDT

Alphabet earnings: Antitrust charges cast long shadow over Google

By Jon Swartz

The Justice Department’s lawsuit against Alphabet Inc.’s Google for abuse of its dominant search-engine business raised regulatory alarms days before the company releases financial results.

The historic lawsuit will be an underlying theme, both in the short and long term, when Alphabet Inc.’s (NAS:GOOGL) (NAS:GOOG) Google announces third-quarter results on Oct. 29 — the same day as Facebook Inc. (NAS:FB) , Amazon.com Inc. (NAS:AMZN) , Apple Inc. (NAS:AAPL) and a raft of other tech companies.

Antitrust story lines abound. On Oct. 28, Google Chief Executive Sundar Pichai is scheduled to testify before the Senate Commerce Committee, with the CEOs of Facebook and Twitter Inc. (NYS:TWTR) , on their handling of content.

What Google and other members of Big Tech face this year and beyond is the inescapable notion of legislation, lawsuits and fines in the U.S. and abroad. On Monday, the head of Japan’s Fair Trade Commission said that country was prepared to work with the U.S. and Europe to address perceived market abuses by Big Tech , adding to Google’s concerns.

For now, Wall Street isn’t particularly spooked: Google shares are up 3% since the lawsuit was announced early Tuesday, and up 20% in 2020. That is likely because digital advertising revenue in the U.S., where Google and Facebook are dominant, is expected to grow 17% in 2021 after an 8% increase in 2020, according to Canaccord Genuity analysts Maria Ripps and Michael Graham. Online-ad companies have enjoyed healthy boosts since Snap Inc. (NYS:SNAP) reported a better-than-expected quarter the same day that Google charges were announced

Read also: Unsure what to do with Alphabet stock amid anti-rust legislation? Get used to it

Indeed, many financial and legal experts are convinced Google won’t crumble under assault from federal regulators.

An unnamed antitrust expert hosted by Wall Street firm Jefferies calls any actions by government “more noise than substance.” Their conclusion is based on the theory that any action will take years to play out, and it is difficult to win under current antitrust laws.

“Although Google search has intuitive appeal given its high profile, our expert believes it will be a tough case to win, as: 1) search product is free; and 2) there are a number of alternatives, including search outside the browser such as with apps (e.g., product search on Amazon, travel search on OTAs/metasearch sites),” Jefferies analyst Brent Thill said in an Oct. 13 note. Thill has a buy rating and price target of $1,800 for Google shares.

At the heart of the Justice Department’s lawsuit is Google’s partnership with Apple. Google’s flagship search engine is the preset default on Apple’s Safari mobile browser, raising the question from analysts on how the iPhone maker may be impacted.  

See also: After charges against Google, road map to antitrust changes contains many potential routes

“Should this [lawsuit] result in any change to the licensing agreement, it could be a modest negative to AAPL’s EPS [earnings per share] power — though we see this as a low probability event,” Evercore ISI analyst Amit Daryanani said in a note Wednesday.

Google has strongly denied doing anything illegal, a point hammered home by former Google CEO Eric Schmidt in a keynote interview at The Wall Street Journal’s Tech Live conference on Wednesday.

“There’s a difference between dominance and excellence,” said Schmidt, a board member of Alphabet until last year. “We worked really hard to avoid any illegal activity. It’s bad public policy to use antitrust to regulate.”

Earnings: Analysts on average expect Alphabet to report earnings of $11.30 a share, up from $10.12 a share a year ago. Analysts have improved their outlook for the quarter since the last earnings report, even though those results showed ad-sales growth continuing to stall and damaged shares ; analysts were projecting $10.41 a share at the end of June.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are even more optimistic, projecting earnings of $11.60 a share on average.

Revenue: Analysts on average expect Alphabet to report $42.8 billion in third-quarter revenue, after accounting for traffic-acquisition costs, known as TAC, up from $33 billion in ex-TAC revenue in the same quarter a year ago. Estimize contributors predict $35.56 billion on average.

Stock movement: Alphabet shares have declined after earnings in three of the past four quarters and four of the past six quarters. The stock is up more than 19% this year through Friday, as the S&P 500 index (S&P:SPX) has increased 5%.

Link to MarketWatch's Slice.