Why The Winner From Google Earnings Is Actually Facebook

Alphabet Inc GOOG GOOGL reported a strong second-quarter earnings beat Monday, despite taking a $2.7 billion hit from the European Commission’s fine last month, but shares traded down about 3 percent after hours.

The dip was also in part due to an increase in the company’s traffic acquisition cost, which rose to $5.09 billion for the quarter and cut back margins.

In sympathy, several other major technology companies saw their stocks fall after Alphabet’s report.

Alphabet Results ‘Bode Well For Facebook’

Facebook Inc FB was one such company, but Citigroup analyst Mark May sees the report at a boon for the social media giant, not cause for concern.

Facebook is Citigroup’s top pick, and May expects to see 46-percent growth, meaning a share price in the $240 range.

The two control over 70 percent of the digital advertising market and own nearly all growth in the space. As such, Alphabet’s and Facebook’s core advertising results are highly correlated.

Based on past correlation, Alphabet’s 22 percent FXN gross Google Properties growth during Q2 suggests that Facebook’s FXN total advertising growth could be as high as 51 percent over the same period, according to May’s estimates.

Besides indicators from Alphabet, May expects further upside to be derived in part from management reducing its calendar 2017 operating expenses growth to not more than 55 percent for non-GAAP.

Facebook will report its Q2 results on Wednesday after the close.

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