- The stock is trading at a valuation below the industry's average
- Higher expenses are driving down the profit margins
- Peaking inflation should lift the foreign exchange pressures
Compared to its peers, Alphabet Inc. (NASDAQ: GOOGL) has been trading on the verge of a 20x price-to-earnings ratio – relatively low for its historic averages. While the investors shy away from companies that heavily rely on advertising revenues, Alphabet depends on its cloud division to lead the growth.
However, with the majority of revenues in foreign currency, its surprising weakness is beyond their influence but possibly short-living.
Google's Q2 Earnings Results
- EPS: US$1.22 (down from US$1.39 in 2Q 2021).
- Revenue: US$69.7b (up 13% from 2Q 2021).
- Net income: US$16.0b (down 14% from 2Q 2021).
- Profit margin: 23% (down from 30% in 2Q 2021). Higher expenses drove the decrease in the margin.
Revenue was in line with analyst estimates. Earnings per share (EPS) missed analyst estimates by 5.1%.
Over the next year, revenue is forecast to grow 13%, compared to a 12% growth forecast for the industry in the US. Over the last 3 years, on average, earnings per share have increased by 36% per year, but the company’s share price has only increased by 23% per year, which means it is significantly lagging behind earnings growth.
While the broad market is trading at 15.7x the earnings, the tech industry is still valued much higher.
Keen to find out how analysts think Alphabet's future stacks up against the industry? In that case, our free report is a great place to start.
Inflation Influences Google's Earnings
In recent months inflation spread around the world like a wildfire, laying waste to customers' purchasing power. Yet, this caused the US dollar to rise to the highest point in over 2 decades, pressuring currencies like the Euro and Japanese Yen. This resulted from diverging central bank policies since the US Federal Reserve raised interest rates 4 times to fight rising inflation.
With the dollar surging, its strength lowered the purchasing power of foreign markets, which make 54% of Alphabet's revenues. By some estimates, this caused a negative impact of almost 4% just in Q2 2022.
With the latest CPI data coming lower at 8.4%, inflation might have peaked already. Therefore, the FED could be stepping away from further hikes causing a pullback in the U.S dollar. Eventually, this should relieve the foreign currency revenue pressure for the company.
For a deeper analysis, you can assess many of the main risks through our free balance sheet analysis for Alphabet with six simple checks. If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/Es below 20x.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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