Google parent Alphabet Inc GOOG GOOGL reports second-quarter earnings after the bell today, July 24. Its recent fine from European regulators is likely to be a big focus for analysts and could possibly overshadow the company’s quarterly results.
Regulators in the EU levied a $2.74 billion fine against the search giant for anticompetitive behavior related to how it was ranking products in Google’s shopping feature. The company announced that it is considering appealing the ruling, but that it will still report the fine in this quarter’s results.
In a press release, the company said it would “report a separate operating expense line for the $2.74 billion charge on the income statement.” In the same release, it also said that the fine is not tax deductible and will reduce GAAP net income and GAAP earnings per share by the full amount.
The fine isn’t the first challenge Alphabet has faced related to Google so far this year. YouTube faced a boycott from advertisers earlier in the year after their ads continued showing next to content they did not want to be associated with. According to reports from Recode, the boycott had largely blown over in the second quarter.
Beyond the advertising boycott, YouTube has been a growing focus among many analysts, even though the company doesn’t break out results from that segment. In April, the company launched a standalone TV offering, YouTube TV, in 5 cities and has been slowly expanding service to other major cities. On last quarter’s earnings call, management referred to YouTube as one of its “three biggest bets” and said they “continue to see extraordinary growth and opportunities” from the video streaming service.
Two other areas that have been a focus for many analysts in the past are Google’s growing Cloud business that competes with Amazon.com, Inc. AMZN Web Services, and its Other Bets division, which includes Nest, Verily, X, and other subsidiaries. Historically, the Other Bets division hasn’t been profitable, but it is focused on developing new technologies and the company typically provides an update on progress within the division.
On top of YouTube and Cloud, the third “biggest bet” the company refers to is hardware. It has continued its push into new products and, according to Techradar, is expected to launch a new Pixel 2, its flagship phone, in the upcoming months.
FIGURE 1: JULY RALLY. Alphabet class C shares (GOOG), along with many stocks in the tech sector, sold off in June, but have been climbing since the start of July. The stock is up a little over 9% since the start of July and is up 23.76% year-to-date. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Alphabet Earnings and Trading Activity
Alphabet is expected to report earnings of $8.25 per share, down slightly from $8.42 in Q2 2016, on revenue of $20.83 billion according to third-party consensus analyst estimates. Once details about the EU’s decision were released, many analysts cut their estimates almost in half to the mid-$4 range to account for the impact of the fine.
Looking at the stock’s trading, it started the month just below $900 for Class C shares and closed at $972.92 on Friday. Despite the run-up, the stock remains a little shy of its all-time high of $988.25 it hit on June 6.
Turning to options activity, traders have priced in just over a 3.5% potential share price move in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading leading up to the earnings release at the July 28 expiration, calls have been active at the 970 and 972.5 strike prices, while puts have been active at the 967.5 and 970 strikes. As of this morning, the implied volatility sits at the 79th percentile.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.
Looking Ahead
A string of food and beverage companies report at the beginning of this week. McDonald’s Corporation MCD reports tomorrow before market open, Chipotle Mexican Grill, Inc. CMG tomorrow after market close, and The Coca Cola Co KO on Wednesday before market open. On top of all the earnings, the Fed kicks off their July meeting this week.
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