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Michael Kramer and the clients of Mott Capital own GOOGL

Alphabet Inc. (GOOGL) shares have plunged since the middle of February by 26.9%, along with the broader S&P 500’s drop of 25.3% as of March 17. Investors will be leaning on the company’s guidance when it reports its first quarter results some time towards the end of April. That guidance is likely to help determine which way shares will go as investors assess the potential impacts of the coronavirus to the company and the broader macro landscape.

So far, analysts’ estimates for the company have remained relatively unchanged, despite the rising economic impact of the coronavirus. Many companies have seen a dramatic decline in their business, resulting in the stock market’s massive drop. The stock market’s decline alone could harm Alphabet’s earnings this quarter.

Potential For Earnings To Disappoint

Consensus analysts’ estimates are forecasting earnings of $12.35 per share for the first quarter, which represents growth of about 3.8% versus the same period a year ago. Those estimates have fallen by around 1% over the past three months. Meanwhile, revenue for the company is forecast to rise by roughly 17.5% to $42.8 billion. Revenue estimates for the company have remained relatively unchanged, falling by 20 basis points over the past 30 days.

One area where Alphabet could see a negative impact on its earnings results may not come from operating income, but from non-operating income. In recent quarters the company has seen an impact on its results due to gains or losses from its equity securities. For example, in the third quarter of 2019, the earnings from the company missed analysts’ expectations. Part of the reason for that miss was due to a an unrealized loss in its equity holdings of about $1.5 billion, which equated to a decrease in earnings per share of $1.47.

With the steep declines in the equity market during the first quarter, it could have a significant drag on Alphabet’s results. While it is hard to equate what the potential impact could be, it seems to be something investors should be paying attention too when the company reports, especially if it should disappoint.

It seems at this point based on changes in analysts’ recent estimates; this potential risk may not be factored into those estimates.

Valuation Lowest Level In Years

The significant drop in the stock has also knocked Alphabets valuation significantly lower on a one year forward price-to-earnings ratio to 17 times 2021 earnings estimates of $63.62 per share.  That is the lowest the stock’s PE ratio has traded at since 2017. However, it could also suggest that earnings estimates are too high, and need to fall. It is worth noting that analysts have been raising their forecasts for 2020 and 2021, since the beginning of this year. However, that may change once the company reports results in April, and investors can get a better handle on the outlook for the balance of the year.

Technical Support

Technically, the stock has fallen to a region of support around $1,000. This price has served as a floor for the stock in the past on several occasions. It is a significant level for the stock and has been since 2017. Should this level of support fail, it is likely to result in the equity falling to a region of $890 to $920. Should that region of support continue to hold, the shares may rebound back to the upper end of that long-term trading range around a price of $1,290.

Where Alphabet shares are likely to go in the future will largely depend upon results in April. If the company can manage to deliver strong operating results and can turn investors’ attention away from the potential impact of the sharp declines in the stock market, then perhaps the stock can move higher. If not, then this could prove to be a tough year for the equity.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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