Alphabet preview

Alphabet is expected to report record sales over the last quarter, but that doesn't necessarily mean it will translate to the bottom line or help lift the troubled stock price.

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Good economy, good for search engines

As the economy rebounds, businesses are back looking for new customers, meaning they are willing to spend more on advertising. 92% of Google's revenue comes from ads. That's one explanation why analysts expect Alphabet to post record sales last quarter for $72.2B.

But, the same analysts are forecasting that earnings will be lower than the prior quarter as the company increases its spending. The consensus is for EPS to come in at $27.77, which would be marginally lower than the $27.99 reported on October 25. One of the things to keep track of is TAC or Traffic Acquisition Costs. This is how much Google spends in driving traffic to its pages and has been increasing. Last quarter, the company spent more on this item than Netflix's entire Q4 revenue!

Cloud & AI future

Last quarter, CEO Pichai emphasized the drive towards AI for the company, committing to further spending with that objective in mind. However, the company has remained conspicuously quiet about the Metaverse. Investors are likely to be very keen to hear whether the most prominent internet company will be moving in that direction. If it does so, it could see investors price in future revenue streams and growth into the stock price.

Alphabet has been trying to break into the cloud market, and last quarter the division finally moved into the black. Analysts may be undervaluing how much cloud could contribute to the bottom line. So far this quarter, other cloud providers have had beats in this area, so it's possible Alphabet will see one as well.

Stock at a critical juncture

Alphabet's share price has not withstood the tech selloff any better than its peers. It did have a remarkable run in 2021 so arguably has further to correct than other members of FAAMG. GOOG saw nearly thrice the gains of NASDAQ, up 72% vs. 27%. After plunging to 2500, it now trades ~5% below its 200-day average. This can be both risky and a good opportunity.

The stock sits in oversold territory on the RSI so there is scopt for a bounce. A rally above its moving average will not confirm a full-blown reversal but at least increase the probability of further upside towards 3k. Before getting there, a notable break of the 2865 swing high must occur.

A failure to move past its 200 DMA, currently at 2700, would suggest renewed bearishness. If history repeats itself, the drop could end 20% below its moving average. This is not only the next level of major support but a similar drawdown to the one seen in the March 2020 COVID crash.

Source: Spreadex Trading Platform

Key Takeaways

Alphabet has come off its all-time high and could be entering a bear market. Beating estimates and containing ad spending costs will set a positive footing for the future but won't necessarily translate to its share price because of the cautious mood around the tech sector.

Revealing plans to enter the metaverse or good results from the cloud segment might add an extra semblance of optimism. Though again, neither the cloud or the metaverse can change the outlook in the medium-term if broader markets continue to descend.