Earnings season is in full swing, particularly for the big tech companies. Last week I covered Tesla Q1 earnings, which got a lot of attention. Tomorrow, Alphabet (NASDAQ:GOOGL) will release its own report for Q1. Given its popularity with retail investors, here’s what I’m going to be watching for from Alphabet.
Growth versus expectations
We’ve got used to large percentage growth figures from the large tech companies over the past few years. For the upcoming Alphabet earnings report, a key part of how the share price will react will be based on whether the figures beat expectations. The bar is already set quite high, with analysts looking for a 20%-25% rise in revenue.
The concern here is that Alphabet could still show double-digit top-line growth for the quarter, but if it falls below expectations then the share price could head lower. As the business gets larger and larger, it’s inevitable that it’ll become harder to keep growing at its usual lofty pace.
For the quarter, revenue growth is expected to have come — mostly — from the Google Cloud division. But other areas, including advertising revenue, should also still be on the increase.
What’s going on with the Cloud?
A key area of focus for Alphabet earnings will be not just the figures but extra information about Google Cloud. This part of the business is growing in terms of revenue, but was heavily loss-making in FY21. It’s expected to lose money again this year. One of the main issues here is the tough competition from the likes of Amazon Web Services (AWS).
In the Q1 report, I’d be interested to see if the company launches any shifts in strategy for the Cloud division. Or it might be that higher levels of investment are going to be funnelled into this area. Whatever the case, investors will likely be keen to understand what the management team is going to do to make this division profitable in the future.
Market sentiment around Alphabet earnings
The final point that I’ll be watching out for is market sentiment both in the lead up to, and the aftermath of the results. We’ve already seen large movements around earnings in recent weeks, including a 25% fall in Netflix shares in a single day. Did the results warrant such a large fall in the share price? Personally, I didn’t think so.
Yet it highlights that at the moment, the market is quite skittish. With the war still raging on in Ukraine, high inflation in the US and rising interest rates, the market in general isn’t overly optimistic. Therefore, I think that Alphabet shares will be volatile, whatever the earnings results are. A small miss could see a large fall in the shares, whereas a bumper result could send them skyrocketing.
As a long-term investor, I won’t be trying to trade in and out in a few minutes as the earnings get released. This isn’t my type of investing strategy.
However, once the report is out, I’ll consider how it could impact the share price in the years to come. From there, I’ll decide whether to buy.