Alphabet (GOOGL) Earnings Expected to Grow: Should You Buy?

Wall Street analysts anticipate that Alphabet (GOOGL) will report an increase in earnings year-over-year, driven by higher revenue when the company releases its quarterly results for September 2024. While this expected outlook is key in understanding the company's financial health, how the actual earnings compare to these forecasts will have a significant impact on Alphabet's stock price in the near future.

Analysts believe that if Alphabet's earnings and revenue exceed expectations in the upcoming report, which is set to be announced on October 29, the stock could see an upward movement. Conversely, any failure to meet these forecasts may lead to a decline in stock price.

The reactions to the earnings call, particularly management's insights into business conditions, are crucial for determining how the stock price will adjust immediately following the announcement, as well as for shaping future earnings expectations. To better understand the likelihood of a positive earnings surprise, we can examine some important factors.

Expected Earnings and Revenue

For the upcoming quarter, Alphabet is projected to report earnings of $1.83 per share, reflecting a notable growth of 18.1% compared to the previous year. Additionally, the expected revenue is approximately $72.78 billion, indicating an increase of 13.6% from the same quarter last year.

Estimate Revisions and Consensus Outlook

In the last month, the consensus earnings estimate for this quarter has remained stable, suggesting that analysts have not changed their initial estimates significantly. This stability can sometimes mask varying opinions within the analyst community, as individual revisions may not affect the overall consensus.

Understanding Earnings Surprise Potential

Analyzing revisions leading up to an earnings release can offer valuable insights into a company's performance. The proprietary model known as the Zacks Earnings ESP (Expected Surprise Prediction) assesses the difference between the Most Accurate Estimate and the Zacks Consensus Estimate. This model suggests that analysts who revisit their predictions shortly before the earnings report tend to provide the most current and potentially accurate insights.

A positive Earnings ESP often indicates a higher chance of an earnings beat, particularly when combined with a strong Zacks Rank (1 for Strong Buy, 2 for Buy, or 3 for Hold). Historical data shows that stocks with both a positive Earnings ESP and a favorable Zacks Rank tend to outperform estimates nearly 70% of the time. On the flip side, a negative Earnings ESP does not guarantee a miss since predicting an earnings beat becomes more challenging with those readings, especially in conjunction with a low Zacks Rank (4 for Sell or 5 for Strong Sell).

Alphabet's Current Position

For Alphabet, the Most Accurate Estimate stands slightly above the Zacks Consensus Estimate, indicating rising confidence among analysts regarding the company’s earnings performance. This scenario results in a positive Earnings ESP of +1.57%. However, the current Zacks Rank for Alphabet is #3, which implies that while the odds are favorable for a positive surprise, expectations should be tempered.

Historical Performance and Its Implications

When evaluating a company’s future earnings potential, analysts often look at past performance. In Alphabet's case, during the last quarter, the expectations were set at $1.85 per share, but the company exceeded that with actual earnings of $1.89, leading to a +2.16% surprise. Over the past four quarters, Alphabet has consistently outperformed earnings estimates.

Conclusion

While an earnings beat or miss can influence stock movements, it's crucial to note that many external factors may also play a role. There are instances where stocks decline despite an earnings beat or rise unexpectedly following a miss due to other developments. Therefore, focusing on stocks anticipated to exceed earnings expectations often improves investment success rates. It is worthwhile for investors to check the Earnings ESP and Zacks Rank ahead of quarterly announcements to identify potentially lucrative opportunities.

All considered, Alphabet appears to be a strong candidate for an earnings surprise this quarter. However, investors should also take into account additional variables before making investment decisions regarding this stock just ahead of the earnings report.

Alphabet, Earnings, Stocks