Unshaken by Covid, Alphabet to gain from high internet traffic in Q1

Alphabet Inc. (GOOG, GOOGL), the parent of internet search giant Google, is one of the few Wall Street firms that gained from the pandemic-related disruption, with internet traffic rising sharply during the shutdown. Having recovered from the recent fall, the company’s stock made steady gains ahead of its first-quarter earnings.

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After a mixed fourth-quarter, the tech giant will be releasing results for the most recent quarter on Tuesday after the closing bell. It is widely expected that earnings and revenues would grow in double digits to $10.98 per share and $40.75 billion, respectively, from last year. Earnings went past expectations in three of the four trailing quarters.

More Clarity

Since the company has started reporting the statistics for its video streaming arm YouTube and cloud segment separately last quarter, the market will be closely following the event to keep track of the trend.

Check Alphabet’s Q4 2019 Earnings Infographic

It is safe to assume that the coronavirus-related disruptions and shutdown would have a limited impact on Alphabet. The services offered by the company have become more relevant in the present situation, wherein individuals and enterprises extensively rely on the internet for communication and conduct of business.

Promising Strategy

The emergence of YouTube as a key revenue driver and the rapid growth of the cloud segment helped Alphabet reinforce its dominance in the online space. The strategy bodes well for the company, given the challenges faced by the core Search business – multiple data privacy lawsuits in the US and Europe. When wearables firm Fitbit joins the Alphabet fold later this year, under an agreement signed earlier, the non-core area of the business will gain further strength.

The aggressive diversification, while maintaining its dominance in the online search space, has made Alphabet more attractive from an investment perspective, though it remains less affordable to many due to the high share price. Almost every analyst following the company recommend buying the stock, which they expect would cross the $1,500-mark after twelve months.

Under Pressure

In the coming months, however, most clients will be forced to reduce ad spending in response to the fiscal crunch caused by the pandemic, putting pressure on Alphabet’s revenues. Some experts believe the impact would be modest, due to the internet giant’s limited exposure to small businesses. As usual, the tech-heavy Other Bets will remain in loss in the first quarter as the management continues to invest in the Waymo robo-car project and life-science business Verily.

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Though margins came under pressure from a spike in traffic acquisition costs in the fourth quarter, it was offset by a strong increase in advertising revenues. At $46 billion, total revenues were up 17% year-over-year, but fell short of expectations. Earnings, meanwhile, moved up 20% to $15.35 per share and topped the Street view.

Stock Rebounds

Several millions were erased from Google’s market value in the last few months as the market cashed amid the pandemic-induced selloff. The shares ended the week at $1,279.31, after losing 17% since mid-February when it hit a record high. Early last month, the stock slipped to a one-year low, before paring a part of loss in the following weeks.