By Jon Swartz
Alphabet Inc.’s growth is slowing, and analysts don’t have a clue as to why because executives aren’t talking.
As Google’s parent company /zigman2/quotes/202490156/composite GOOGL -3.18% /zigman2/quotes/205453964/composite GOOG -3.21% nears its fiscal second-quarter results on July 25, the chorus of disapproval about its evasive financial-reporting practices has increased on Wall Street. After releasing disappointing first-quarter results in late April, executives were vague, if not outright unresponsive, about slowing growth.
For more: Google sales growth is slowing, and it sure would be nice to know why
“We delivered robust growth led by mobile search, YouTube, and Cloud with Alphabet revenues of $36.3 billion, up 17% versus last year, or 19% on a constant currency basis,” Alphabet Chief Financial Officer Ruth Porat said in a statement at the time. “We remain focused on, and excited by, the significant growth opportunities across our businesses.”
Deciphering where the revenue fell short was complicated by the way Alphabet structures its segments. There are three major businesses listed on the earnings report: Advertising (which includes search and YouTube); “Other revenues” (a mix of hardware, Google Cloud, and its app store); and “Other Bets” (a collection of upstart ventures that lose money). That’s the extent of the disclosure, which leaves investors in the dark on performance of specific properties like YouTube and Google Cloud.
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That wasn’t good enough for analysts or investors, who were staring at the slowest sales growth for the online-advertising giant since the fourth quarter of 2015.
“A concern for us is the lack of clear communication from management into the cause of the faster-than-expected top-line deceleration,” SunTrust Robinson Humphrey analyst Youssef Squali wrote in a note, while reducing his price target on Alphabet stock to $1,325 from $1,350. “The lack of visibility or a clear explanation into the revenue deceleration has left us more cautious than before.”
Added Jefferies analyst Brent Thill: “The continued lack of transparency was troubling to investors.” He maintains a buy rating and price target of $1,450.
YouTube might be a culprit, even though Google does not break out revenue for the division despite a suggestion from the Securities and Exchange Commission that it do so.
Ironically, the long-shot possibility of the Justice Department seeking a breakup of the company — Big Tech, also including Apple Inc. /zigman2/quotes/202934861/composite AAPL -4.62% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -3.10% and Facebook Inc. /zigman2/quotes/205064656/composite FB -2.36% , are being investigated for antitrust — could force Alphabet’s hand.
“We believe ‘breaking up the FAANGs’ will be a key issue during the 2020 presidential election,” Needham analysts wrote. “We foresee Alphabet taking action well before any elected official mandates how many pieces they must create.”
Absent details, some analysts have speculated on what future businesses can get generate in sales. Google Maps, for example, could rake in nearly $10 billion by fiscal 2023, according to UBS analyst Eric Sheridan. Sheridan believes Alphabet is the best-positioned company to grab a slice of the $650 billion global ad market that caters to local merchants as they skew toward digital services for customers with mobile devices.
“Given its family of mobile computing utility and media consumption apps (mobile search, Maps, YouTube), we see Alphabet’s competitive position and investments as driving out-sized returns as these secular themes move to the forefront of local ad budget planning,” Sheridan said in a note in early May.
What to expect
Earnings: On average, the 39 analysts surveyed by FactSet expect Alphabet to post earnings of $11.10 a share, down from the $11.33 a share expected at the beginning of the quarter (March 31). In the second quarter a year ago, Alphabet reported earnings of $4.54 a share due to a large fine from Europe; without that charge, earnings would have been $11.75.
Estimize, which crowdsources estimates from buy and sell-side analysts, fund managers, academics and others, is forecasting EPS of $11.89, based on 300 estimates.
Revenue: Wall Street expects total revenue of $38.15 billion from Google, reduced to $29.48 billion after accounting for traffic-acquisition costs, according to analysts polled by FactSet. Google reported revenue of $32.7 billion during last year’s second quarter, with ex-TAC sales of $26.24 billion. Estimize contributors are forecasting revenue of $31.05 billion.
Stock movement: Alphabet shares are up 10% this year through Thursday’s close at $1,147.24 per share, compared with a gain of 19% for the S&P 500 index /zigman2/quotes/210599714/realtime SPX -2.59% . Google stock is down 4% over the last 12 months.
Of the 42 analysts who cover Google, 36 have buy or overweight ratings, and 6 have hold ratings, with an average price target of $1,335.22, according to FactSet data.