Alphabet Inc. (NASDAQ:GOOG) reported earnings don’t tell the whole story

Alphabet Inc. (NASDAQ:GOOG) reported earnings don’t tell the whole story

Alphabet Inc. (NASDAQ:GOOG) reported earnings don’t tell the whole story

Unlike most large-cap public companies, Alphabet (NASDAQ:GOOG,GOOGL), more commonly referred to as Google, doesn’t report adjusted earnings. That’s not necessarily a problem for Google stock — even as it trades at a five-month high. But understanding the actual underlying business is key to understanding GOOGL stock.

Non-GAAP accounting has been the subject of debate for years. Many observers and investors argue that companies use ‘adjusted’ figures to hide data they won’t investors to see — or create growth that isn’t really there. But Google stock shows the flipside of GAAP accounting: it’s not quite as accurate, or indicative of underlying performance, as some think.
Again, that doesn’t mean GOOGL stock is a sell (even though I do question valuation here). But it does mean that what Google’s GAAP earnings show doesn’t quite match what the business is doing.

Earnings and Google Stock

Here’s the trajectory shown by Google’s GAAP earnings per share figures, along with 2019 analyst estimates:

2016: EPS of $27.85, rising 14.4% year-over-year;
2017: EPS of $18, declining 35% year-over-year;
2018: EPS of $43.70, increasing an astonishing 143% against 2017;
2019 estimates: $47.05, up 7.7%.
To look at those numbers would suggest a rather volatile business. But, of course, that’s far from the truth. Google — given its dominance in advertising — is actually a quite stable business. Rather, one-time factors have been at play.

In 2017, for instance, the company took a one-time charge of $14.05 per share due to the accounting effects of tax reform. (Most of that came from a one-time tax on its overseas earnings.) Accounting rules changed in 2018, requiring the company to account for changes in the valuation of its equity securities. (Alphabet owns stakes in companies as diverse as Lyft, Care.com (NYSE:CRCM), Snap (NYSE:SNAP), FanDuel, and LendingClub (NYSE:LC).

According to the Q4 2018 release, that accounting change added $5.70 to 2018 EPS. And with a Lyft IPO on the way, the new rules should further benefit Alphabet earnings in 2019.

Removing the two major one-time effects, Alphabet’s growth profile looks much different:

2016: EPS of $27.85, rising 14.4% year-over-year;
2017: EPS of $32.05, climbing 15% year-over-year;
2018: EPS of $38.00, up 18.6% against 2017;
2019 estimates: ???
After all, we don’t know how much benefit from the equity ownership analysts are modeling — adding another layer of complexity to Google stock in 2019.

Other Factors That Impact GOOGL Stock

But there are other factors at play here that impact Alphabet earnings. What looks like an acceleration in EPS growth in 2018 — excluding one-time factors — actually wasn’t. Operating income growth was minimal, rising less than 1% after a 10% increase in 2017. Instead, Alphabet — backing out the one-time effect in Q4 2017 — just benefited from a lower tax rate.

From that standpoint, it looks like Alphabet earnings actually are slowing to a crawl. Operating margins are compressing, and underlying profit is barely growing. But here, too, investors have to look closer.

Once again, there are one-time factors. The first is the effect of fines levied by the European Commission. Alphabet breaks out segment-level profits, and ‘reconciling items’ are deducted from its operating profit. Those items include corporate overhead — and of late, those fines. The impact from reconciling items rose from $598 million in 2016 to a whopping $6.84 billion in 2018.

There’s another factor affecting operating earnings. Alphabet is losing more money from its “Other Bets” businesses. Operating loss there was $3.36 billion in 2018 — against $2.73 billion the year before. That’s not a surprise: the category includes startup businesses like self-driving car business Waymo and life sciences incubator Verily.

Overall, the bias in prices is: Upwards.

Note: this chart shows extraordinary price action to the upside.

By the way, prices are vulnerable to a correction towards 1,124.27.

The projected upper bound is: 1,235.78.

The projected lower bound is: 1,139.47.

The projected closing price is: 1,187.62.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 5 white candles and 5 black candles. During the past 50 bars, there have been 26 white candles and 24 black candles for a net of 2 white candles.

A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 69.2168. This is not an overbought or oversold reading. The last signal was a sell 0 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 66.55. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 2 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 73. This is not a topping or bottoming area. The last signal was a sell 1 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 11 period(s) ago.

Rex Takasugi – TD Profile

ALPHABET INC C closed down -0.200 at 1,184.260. Volume was 23% below average (neutral) and Bollinger Bands were 29% wider than normal.

Open High Low Close Volume___
1,183.3001,190.0001,177.4211,184.260 1,292,633

Technical Outlook
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish

Moving Averages: 10-period 50-period 200-period
Close: 1,172.21 1,112.74 1,127.93
Volatility: 22 28 32
Volume: 1,501,516 1,483,743 1,639,390

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

ALPHABET INC C is currently 5.0% above its 200-period moving average and is in an upward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of GOOG.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on GOOG.O and have had this outlook for the last 10 periods.

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