Alphabet (GOOGL) has been one of the most searched stocks on Zacks.com recently, so it may be worth highlighting some facts that could drive the stock's performance in the near term.
Shares of the internet search leader have returned -0.8% over the past month compared to a +1.5% change for the Zacks S&P 500 composite index. The Zacks Internet – Services industry, which Alphabet belongs to, has lost 7.2% in that period. The big question here is, where is this stock headed in the near term?
Media announcements or rumors of significant changes in a company's business outlook will usually make the stock “trend” and cause immediate price movements, but there are always some fundamental facts that ultimately drive the buy-and-hold decision.
Earnings forecast revision
At Zacks, we prioritize evaluating the changes in a company's earnings estimates over other factors because we believe the fair value of a stock is determined by the present value of its future earnings stream.
It essentially looks at how sell-side analysts covering the stock are revising their earnings forecasts to reflect the impact of the latest business trends. As a company's earnings forecasts rise, so does the fair value of its stock. If the fair value is higher than the current market price, investors will be interested in buying the stock, driving the share price up. This is why empirical studies have shown a strong correlation between trends in earnings forecast revisions and short-term stock price movements.
For the current quarter, Alphabet is projected to post earnings of $1.83 per share, which would represent a +18.1% change from the year-ago period. The Zacks Consensus Estimate has changed +0.4% over the past 30 days.
The consensus earnings estimate for the current fiscal year is $7.63, indicating a change of +31.6% year over year. Over the past 30 days, this estimate has changed +0.1%.
Looking at the next fiscal year, the consensus earnings estimate is $8.64, representing a +13.2% change from what Alphabet was expected to report a year ago. Over the past month, estimates have changed +0.1%.
The Zacks Rank, our proprietary stock rating tool with a strong outside-audited track record, effectively harnesses the power of earnings estimate revisions to provide a more certainty view into near-term stock price direction. The magnitude of the recent change in consensus estimates, along with three other factors related to earnings estimates, have earned Alphabet a Zacks Rank #3 (Hold).
The story continues
The chart below shows the evolution of the company's consensus EPS estimates over the next 12 months.
12 Month EPS
Projected Revenue Growth
A company's earnings growth is arguably the best indicator of a company's financial health, but nothing happens if the company can't grow earnings. It's nearly impossible for a company to grow its earnings without growing its revenue over the long term. Therefore, knowing a company's earnings growth potential is very important.
For Alphabet, the consensus revenue estimate for the current quarter is $72.79 billion, indicating a change of +13.6% year-over-year. For the current and next fiscal years, estimates of $296.53 billion and $330.36 billion indicate changes of +15.6% and +11.4%, respectively.
Last reported results and surprise history
Alphabet reported revenue of $71.36 billion in its most recent quarter, up 15% from the same period a year ago, and earnings per share of $1.89, up from $1.44 a year ago.
Compared to the Zacks Consensus Estimate of $70.6 billion, reported revenues represented a surprise of +1.07%. EPS surprise was +2.16%.
The company has beaten consensus EPS estimates in each of the last four quarters, and revenue also beat consensus estimates in each quarter during that period.
evaluation
No investment decision can be made efficiently without taking into account stock valuation. Whether a stock's current price properly reflects the intrinsic value of its business and the company's growth prospects is a key factor in determining future stock price movements.
Comparing the current value of a company's valuation multiples such as Price to Earnings (P/E), Price to Sales (P/S), Price to Cash Flow (P/CF) with its historical values helps in identifying whether the stock is fairly valued, overvalued or undervalued. Also, comparing a company with its peers based on these parameters gives a good idea of how reasonably priced its stock is.
The Zacks Value Style Score, a part of the Zacks Style Scores system, evaluates both traditional and non-traditional metrics, categorizes stocks into five groupings from A to F (A is better than B, B is better than C, etc.) to help identify whether stocks are overvalued, fairly valued or temporarily undervalued.
Alphabet is rated a C on this score, indicating that it is trading in line with its peers. Click here to see the values of some of the valuation metrics that drove this rating.
Conclusion
The facts discussed here, and many other information on Zacks.com, may help you decide whether the market buzz around Alphabet is worth following, however, its Zacks Rank #3 suggests the company is likely to perform in line with the overall market in the near term.
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Alphabet Inc. (GOOGL) : Free Stock Analysis Report
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