Alphabet (Google) share price: what’s the outlook leading into the Q1?

Following a horror third quarter, Alphabet (parent of Google) finished out 2020 strongly, posting stellar growth across the board in Q4.

The highlights of the 2020 fourth quarter release included:

• Total revenues of $56.89 billion
• Services revenue ($52.8 billion), Cloud revenue ($3.8 billion) and Other Bets revenue ($196 million)
• Operating income of $15.6 billion against an operating margin of 28%
• Net income of $15.2 billion against earnings per share (EPS) of $22.30

Alphabet share price outlook: lofty expectations abound

Those strong results have boosted investor confidence, with the stock up 21% in the last 3-months and 14% in the last 1-month. The Alphabet share price (ticker: GOOG) finished Monday’s session at $2,326.74 per share.

Analysts are equally confident leading into the first quarter earnings: by the averages, the stock commands a Buy rating and boasts a price target of $2,492 per share, suggesting analysts see further upside from current price levels, according to Market Watch.

On a more granular level, analysts on average expect the search giant to report Q1 EPS of $15.74 and Q1 revenue of $51.53 billion, according to Yahoo Finance.

In the last 7 days analysts have ratcheted up their price targets on Alphabet: Truist, Mizuho, KeyCorp, Credit Suisse, and BMO Capital Markets all boosted their price targets on the company.

Exane BNP Paribas initiated coverage on the company with an Outperform rating, and Jefferies, who looks to be one of the most bullish on GOOG, raised their rating from Positive to Buy and their price target from $2,400 to $2,700 per share.

Given the maturity of the company, the market will likely pay close attention to the search giant’s earnings performance. On a relative basis, expectations for Alphabet are elevated, with the stock’s earnings multiple (37.2x) well above the market and its big-cap tech peer Facebook – arguably the most analogous company in the FAAMG cohort.

This is not to say that the market will disregard Alphabet’s top-line performance. In fact, Google’s cloud division will likely be closely scrutinised by the market. Amazon and Microsoft continue to aggressively build market share, with Microsoft in the prior quarter hitting quarterly cloud revenues of $14.6 billion, implying year-on-year growth of 23%.

While Google is no slouch in the cloud department, it’s $3.8 billion in Q4 cloud revenues pales in comparison to its large-cap competitors. Indeed, that’s not to detract from Google’s solid cloud growth, with management recently saying that they have invested aggressively given ‘the substantial market opportunity.’

'We're encouraged by the momentum in the growth of revenue and customer wins. We more than doubled revenues over the last two years, from $5.8 billion in 2018 to $13.1 billion in 2020,’ management said during the Q4 2020 earnings call.

Remember: Easier Comps

Here’s what management said about the upcoming quarters during the Q4 2020 earnings call:

‘Looking forward to 2021, year-over-year quarterly comparisons will be affected meaningfully by the impact of COVID last year – with easier comps in the first half, especially in Q2, and then lapping stronger performance in the second half.’

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