Can Alphabet’s share price continue to outperform?

While Alphabet’s [GOOGL] share price managed to rally to an all-time high of $1,726.10 during intraday trading on 2 September, an ensuing tech sell-off left the stock trading at $1,465.60 by the end of the month — just 0.7% off its 200-day moving average. Since then, Alphabet’s share price has perked up, climbing 9.1% through the month to 27 October and registering a year-to-date climb of 19.4%. However, with the company set to report third-quarter earnings on 29 October, Alphabet’s share price could be heading for a dip.

When the company announced its second-quarter results on 30 July, Alphabet’s share price fell 3.2%. The downbeat reaction was due to its announcement of a revenue fall, something the company hasn’t experienced since its inception.

Prior to the pullback, Alphabet’s share price had been performing well. The stock had recovered from the coronavirus-induced downturn, which drove it to a 52-week low of $1,008.87 during intraday trading on 23 March, to trade above its February high of $1,530.74 by the start of July.

The stock has returned 26.8% in the past 12 months, outpacing the US market’s 15.6% return in the same period, data from Simply Wall Street shows. However, Alphabet’s share price has underperformed the broader US interactive media and services segment, which rose 37% in the same period.

A first-ever revenue fall

During the quarter ending 30 June, the pandemic induced pull-back in advertising spending — from which Alphabet derives the bulk of its revenue — sent the company’s ad revenue down 8% year-over-year to $29bn. This weighed down the group’s total revenue by 2% to $38.2bn.

Ruth Porat, CFO at Alphabet and Google, said YouTube ad revenues saw a 6% year-over-year uptick during the quarter, but brand and networking ad revenues were both down.

The group’s strongest division appeared to be its Google Cloud business, which gained 43% from the year-ago period to $3bn, driven by growth in its data and analytics platform.

Alphabet did not provide any guidance for the upcoming third quarter, however. Porat said it was “premature to gauge the durability of recent trends given the obvious uncertainty of the global macro environment”.

She advised investors and analysts to continue to look at the global macroeconomic performance, as its correlation with ad spending is a “key signal to monitor”.

Looking ahead to third-quarter earnings estimates, analysts are forecasting earnings and revenue to rebound from the previous quarter. According to data by Alpha Value and Investopedia, earnings and revenue are set to rise 13.9% and 5.7% respectively.

Growth is expected to be driven by Alphabet’s cloud revenue, which — spurred on by the work-from-home economy — is forecast to post another quarter of healthy gains. However, this is expected to be at a slower pace than previous quarters.

Social media landscape fuels bulls

Following Snap’s [SNAP] blowout third-quarter earnings report on 21 October, analysts have reason to believe that ad revenue may also be robust for Google. Snap’s strong advertising momentum lifted social media stocks across the board, which sent positive signals to investors watching Alphabet’s share price.

Mark Shmulik, an analyst at Bernstein, is bullish, suggesting Google is hard ignore in terms for upside potential. “If Google can inflect search revenue growth back into positive territory, close the revenue growth gap with Facebook, and create positive momentum on Cloud/YouTube, that should be enough,” he wrote in a note seen by Barron’s.

He has an Outperform rating on Alphabet’s share price with a target of $1,800.

Among the 44 analysts polled by MarketBeat, the consensus rating was to Buy the stock, the opinion held by 42 analysts, while two considered the stock a Hold. The average 12-month target for Alphabet’s share price was $1,686.58, representing a 5.5% uptick on its price at close on 27 October.

The biggest headwind facing Alphabet’s share price in the near-term is the Justice Department’s long-anticipated antitrust lawsuit over its “unlawfully maintaining monopolies”, which it filed on 20 October.

When analysts asked about the case during its second-quarter earnings call, CEO Sundar Pichai said “scrutiny is going to be here for a while”.