Alphabet Destroys Consensus Estimates on Big Gains and Small Losses

Love it, hate it, or somewhere in between, there are very few who don't know the name Alphabet (NASDAQ:GOOGL), parent company of Google. The company just turned in a massive hit on its earnings reports, and showed just why it's a major figure in the search engine and cloud computing industries right now. Though not everything went as the company likely hoped it would, it still had successes enough to make its influence felt.

One Massive Set of Wins

Alphabet turned in a series of major victories on the strength of its numbers alone. The company brought in a whopping $22.30 per share, which compares nicely to the consensus estimates looking for $15.90 per share.  Quarterly profit was a straight-up $15.2 billion, which again compares well to estimates of $10.895 billion.

The outlook for 2021 also improved, as immediately, the company discovered it was in line for major cost savings out of the gate. Analysis of the company's hardware—particularly networking gear, servers and the like—revealed that the useful life of said hardware is going to be at least a year, and potentially longer, than expected. That means a $2.1 billion operating results boost for the year as the company doesn't need to undertake any major replacement projects.

Better yet, the company's advertising business was also on a tear. Advertising accounted for 81% of the company's fourth-quarter sales, up 23% against this time last year. Reports noted that the combination of massive online shopping and recovery from lockdowns as vaccines and treatments for COVID-19 helped fuel much of the gains. Google's cloud-based operations, meanwhile, were likewise up, as Google Cloud posted sales of $3.83 billion for the quarter and $13.1 billion for the year.

Analysts Still Holding Steady

The broader analyst pool, as detailed by our latest research, is sticking to its collective guns here and going with a “buy” rating, as it has for the last six months. The consensus has only improved, albeit narrowly, since.

Six months ago, the company had three “hold” ratings and 39 “buy” ratings. Three months ago, that ratio improved to three “hold” and 41 “buy”. A month ago, we found just two “hold” ratings, but 39 “buy” ratings, and now, we're at two “hold” and 38 “buy”, which means a very slight improvement toward bullish over levels seen just six months ago.

The price target, meanwhile, has also gone up in that time frame. Six months ago, it sat at $1,661.63 before increasing to $1,758.87 three months ago. A month ago, it sat at $1,803.52, before reaching its current level of $2,004.72, the first time the consensus price target has represented downside potential. The company trades at $2,059.96 as of this writing.

Alphabet Missing a Few Letters

There are some signs that not every cylinder is striking at Alphabet. Despite growing sales at Google Cloud, the company still reportedly posted an operating loss of $1.2 billion for the fourth quarter, and $5.6 billion for the year, which is a 21% greater loss from the numbers seen in 2019.

Moreover, costs are on the rise, with little surety of return. Operating data centers, licensing content for its YouTube operations, and the like have drive costs up, now accounting for about $0.27 for every dollar made in sales. That's up from $0.23 just four years ago. Amazon (NASDAQ:AMZN) is an increasing threat to Alphabet's lead in the worldwide advertising market, and companies like Alibaba (NYSE:BABA) are increasingly making inroads in their respective geography.

Throw in a regulatory environment that's increasingly against Alphabet and its products—antitrust suits, free speech issues and so on—and that's just one more problem in the stack. The company's share of internet advertising is in decline, and there's a growing movement against Alphabet products in general, with activist groups pointing out alternatives to everything from YouTube to Google search. Yet there's little denying that, right now, Alphabet's primacy in internet operations is unquestioned. This is still the go-to option for operations ranging from searches to cloud storage to video provision. People use Alphabet-related services every day.

While the massive price tag to own a share of Alphabet will likely scare off most casual investors, owning Alphabet is the surest way to owning a solid piece of the internet itself. Given how vital that technology has proven to be in the last several months, buying in on Alphabet is hard not to recommend.