As the article about Alphabet (or « Google ») over a year ago indicated, the company is pretty much unbeatable in its core business and its « Other Bets » endeavours are a nascent yet rather manageable drag on earnings. In the present day, however, there are larger macroeconomic conditions to consider owing to the company’s distinctive revenue lines.
Revenue Segments and Trends
The company’s quarterly financial statements indicate a overwhelming dependence on advertising in both Search and YouTube for revenues:
Applying a « heat map » schema on the different revenue lines indicate that advertising revenue breakdown hasn’t really seen a momentous shake-up (or even a slight one, for that matter) for several years. While YouTube and Network ads compete with another, search-based advertising outstrips all others in contribution by a vast margin.
Another interesting feature has been the slight rise in revenue contribution by the company’s Cloud business. Now, the cloud computing business is generally considered to have a high switching cost in service providers. This means that expecting this segment to start producing a significant bulk of the revenue any time soon wouldn’t be a very realistic proposition.
A « heat map » schema on quarter-on-quarter (QoQ) revenue growth, however, uncovers some interesting trends that are contextualized by the revenue share heat map:
Macroeconomic Factors and Price Ratio Trends
Given the importance of advertising, the company’s fortunes bear a striking resemblance to that of Meta Platforms (which had been covered last week). Thus, the overall picture for advertising is generally similar: revenues are generated from advertisers and not the users. While digital ad spending is here to stay and will remain the dominant form of advertising, how much or how often advertisers will spend is absolutely dependent on macroeconomic conditions.
The overall macroeconomic outlook has been covered in a number of articles over the past few months. Overall, it’s not a pretty picture: individual debt remains high and wage earnings growth isn’t really keeping up with inflation.
Overall, Consumer Price Index levels show a returning trend in increasing month-on-month deltas in inflation since July:
With an ongoing squeeze in incomes and spends, the question is: will advertisers continue to spend as much and as frequently as they used to? If the answer is yes, the company’s revenue streams are likely to rise in the near- to mid-term. If not, the tension the streams face bear a strong relationship with the broader economic outlook.
An examination of the trends in the Price to Earnings (PE) Ratio relative to the broad-market S&P 500 with year-wise correlation as a « goodness of fit » measure would be in order, similar to that done in recent articles about Apple and Meta.
As it turns out, there’s a roughly similar tale in trends coming to light: while the company was valued somewhat higher than the index in 2019 and 2020, the stock did face a reversal of sorts in 2021. In the Year to Date (YTD), the higher relative valuation is missing and correlation has been increasing in nearer periods.
Given its close relationship with advertising (and by extension, consumer spending), analysts generally deem the company to be an important bellwether for the economy. In consensus estimates in the YTD so far, the company missed them by a small margin.
An unwritten rule of thumb among institutional analysts is that earnings growth are generally estimated somewhat conservatively. As a result, positive earnings surprises tend to be more common than not. As a result of the surprise, there is a momentary bump in the stock’s price. However, earnings expectations being missed by a company that is rather exceptionally well-led and essentially has global dominance in its core business suggests that the tensions wrought by macroeconomic conditions had been underestimated.
Furthermore, individual investors have been exiting the market in droves throughout the year, with the last week of September alone accounting for nearly as much in exits as the rest of that month.
This has also contributed to the loss of market liquidity that a previous article covering the October edition of Bank of America’s Fund Manager Survey had indicated. Alphabet’s growing correlation with the broader index is another cause for concern. As the survey indicated, nearly 91% of the survey’s respondents don’t expect global earnings per shares (EPS) to rise substantially over the next 12 months.
In confirmation of this assertion is the fact that the forward earnings of the S&P 500 is also under significant bearish pressure and has already erased valuation gains nearly all the way back to start of 2019.
There’s every possibility that most analysts might have adjusted their models as a result of which Alphabet’s upcoming earnings will be a positive surprise. Given lowered liquidity, there’s no telling if the stock price bump will be pronounced or even sustained. However, given that the company’s stock is included as a constituent of many broad ETFs and ETF volumes have been rising, it is very likely that the stock price will witness some rises as further units of ETFs are created and traded.
On its own, however, the merits of picking the stock isn’t very clear at the moment, through no fault of the leadership’s business decisions or any rival. Quite simply, it’s the economy.
Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500, and the upside or the downside to Alphabet’s stock.
Violeta a rejoint Leverage Shares en septembre 2022. Elle est chargée de mener des analyses techniques et des recherches sur les actions et macroéconomiques, fournissant des informations importantes pour aider à façonner les stratégies d’investissement des clients.
Avant de rejoindre LS, Violeta a travaillé dans plusieurs sociétés d’investissement de premier plan en Australie, telles que Tollhurst et Morgans Financial, où elle a passé les 12 dernières années de sa carrière.
Violeta est une technicienne de marché certifiée de l’Australian Technical Analysts Association et est titulaire d’un diplôme d’études supérieures en finance appliquée et investissement de Kaplan Professional (FINSIA), Australie, où elle a été conférencière pendant plusieurs années.
Julian a étudié l’économie, la psychologie, la sociologie, la politique européenne et la linguistique. Il possède de l’expérience en matière de développement commercial et de marketing grâce à des entreprises qu’il a lui-même créées.
Pour Julian, Leverage Shares est une entreprise innovante dans le domaine de la finance et de la fintech, et il se réjouit toujours de partager les prochaines grandes avancées avec les investisseurs du Royaume-Uni et d’Europe.
Oktay a rejoint Leverage Shares fin 2019. Il est responsable de la croissance de l’activité à travers des relations clés et le développement de l’activité commerciale sur les marchés anglophones.
Il a rejoint LS après UniCredit, où il était responsable des relations avec les entreprises pour les multinationales. Il a également travaillé au sein de sociétés telles qu’IBM Bulgarie et DeGiro / FundShare dans le domaine de la finance d’entreprise et de l’administration de fonds.
Oktay est titulaire d’une licence en finance et comptabilité et d’un certificat d’études supérieures en entrepreneuriat du Babson College. Il est également détenteur de la certification CFA.
Sandeep a une longue expérience des marchés financiers. Il a débuté sa carrière en tant qu’ingénieur financier au sein d’un hedge fund basé à Chicago. Pendant huit ans, il a travaillé dans différents domaines et organisations, de la division Prime Services de Barclays Capital à l’équipe de recherche sur les indices du Nasdaq (plus récemment).
Sandeep est titulaire d’un master spécialisé en finance et d’un master en administration des affaires de I’Institut de technologie de Chicago.