Will Google Stock Go Up After Earnings?

Alphabet’s latest earnings release sent shock waves reverberating throughout the financial world last week as the tech giant smashed analyst estimates to deliver one of the most dramatic revenue filings in recent memory.

The company crushed expectations across every segment, growing top and bottom line numbers wildly in excess of anything that Wall Street watchers could have predicted.

Shares in Google [(GOOG), (GOOGL)] were up the day of results – although since then its stock has only been trading sideways. Given the company’s meteoric rise this last year – more than doubling in price from $1,100 in March 2020 to $2,700 today – investors are increasingly concerned that this momentum will stall – and worse, that a severe correction is on its way?

Google’s Blockbuster Quarter

It’s difficult to overstate just how good Alphabet’s second quarter 2021 results actually were.

Media headlines spoke of the firm tripling operating income and beating earnings per share (EPS) estimates by $7.99 with a net profit of $27.26.

Similarly, revenues of $61.88 billion were also up massively year-on-year, confounding analyst guesses by $5.8 billion, and increasing 61.6% from the same quarter in 2020.

But digging down deeper reveals the extent of Google’s across-the-board performance. Total advertising revenue was up 69% at $50.44 billion, but the individual segment numbers were fascinating.

YouTube advertising revenue grew 83% from $3.8 billion to over $7.0 billion, as did Google Search, increasing 68% to $35.8 billion. Google Services also squashed expectations, beating analyst predictions of $51.9 billion to post revenue of $57.0 billion, again up 63% from June 2020s figure of $35.0 billion.

Alphabet’s operating income went up three-fold from $6.38 billion to $19.4 billion – and its operating margins were bettered too, up from 17% to 31%. 

The cause of Google’s good fortune was due almost entirely to “a rising tide of online activity” across the globe in response to the restrictions arising out of the coronavirus pandemic. 

The Bear Case

Google (GOOG) will be hard pressed to repeat such a great quarter in another three months’ time, although it’s certainly not impossible.

On a like-to-like quarterly basis, Alphabet could still post good numbers since the pandemic headwinds this time last year hadn’t fully let up, so comparisons could again be favorable.

The problem, however, comes from sequential results – it’s simply just too difficult and unrealistic to see Q3 beating such a stellar Q2 given the figures involved.

Indeed, Alphabet management has already softened expectations during their earnings conference call. Alluding to the fact that Google broke a number of records in the second quarter, Chief Financial Officer Ruth Porat noted several reasons to be cautious going forward.

To begin with, it’s still too early to say whether the pandemic recovery will continue in the same fashion as it has so far this year, especially given the apparent resurgent of COVID variants lately.

Furthermore, the second half of 2020 was definitely stronger financially than the first, so lapping the same comparisons with the third quarter will be problematic.

And finally, the company benefited from a positive foreign exchange tailwind in Q2 which management believe is unlikely to persist throughout Q3.

Therefore, the results of a comparatively “bad” third quarter could knock investor confidence and give short sellers an opportunity to capitalize on negative sentiment.

But Don’t Bet Against The Bulls

As good as this results season was, there are still plenty of Google shareholders that actually think the company is undervalued at the moment.

And they might very well be right, too – analysts seem to overlook the growth potential of Alphabet’s nascent Cloud business, as not only did the firm increase its Google Cloud revenues over 50% from $3.0 billion to $4.6 billion, the space itself is also expanding at a rapid rate.

The shift to remote work brought about by the coronavirus crisis meant that firms had to bring forward their digital transformation programs, and the three principal companies underpinning these efforts – Microsoft (MSFT), Amazon (AMZN) and Google – all reported positive earnings on the back of this.

Indeed, infrastructure spending on Cloud services is speeding up, with $47 billion spent in Q2 2021 compared to $12 billion for the same period last year. And Google (GOOG) currently lags behind on infrastructure investment when pitted against its rivals Amazon and Microsoft, contributing just 8% to that total, where its competition accounts for 31% and 22% respectively.

In fact, where Amazon is concerned, its own Cloud business, Amazon Web Services, was a notable success story for the company in a quarter where it missed revenue targets and guidance. Given where Alphabet stands with its own Google Cloud segment, this part of its operations is surely ripe for a boom – and if it can close the gap on other players in the space, this can only help drive its stock value upwards in the future.

Will Google Stock Go Up? Closing Thoughts

Google’s in an unusual spot right now: a record quarter comes at the peak of an unprecedented run-up, and the market has reacted by flat-lining its price action. The pressure’s on to repeat that otherworldly feat in Q3, but it seems that Alphabet’s management is already talking down the possibility just days after releasing its historic figures.

But the firm from Mountain View looks, for all intents and purposes, to be unstoppable. There’s no turning the clock back on society’s shift to an online culture, and Google is the prime business ready to benefit from this. Why one record quarter can’t be followed by another is anyone’s guess. Short interest in Google stands at 0.48% at the moment. That should tell you everything. Don’t sell Google – just buy more.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.