When Alphabet Inc. releases its results on Monday, the European Union’s $ 5.07 billion antitrust fine on Android will ruin the company’s profits.
The fine against Alphabet GOOGL,
was officially announced last week and Google announced plans to appeal the fine. However, the company revealed in an SEC filing that it will account for the fine in its second quarter report, due Monday after the bell.
In terms of what it will cost the company in cash, the fine is not tax deductible and represents around 75% of the company’s expected second quarter net profit of $ 6.72 billion, which will reduce also significantly earnings per share. Since analysts’ estimates largely do not include the fine at this time, Alphabet’s earnings are likely to significantly miss published earnings expectations.
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The question that remains beyond the fine itself is how Google, in the long run, will react to the move, which prevents the search giant from effectively forcing mobile phone makers and telecommunications companies. to preinstall its search engine and Chrome web browser, among other Google mobile applications, in exchange for using the Android operating system. The decision is expected to take effect in 90 days, although an appeal would delay implementation.
In a blog post Released Wednesday, Google chief executive Sundar Pichai essentially said that following the ruling, Google may start charging device makers for its operating system, and the company may also restrict the distribution of ‘Android.
If the EU fine is upheld, as are the attached provisions, analysts say it could impact the company’s products, but it might not affect the company’s profits in Europe.
“Although Google has indicated that it will appeal the decision, we believe potential solutions to coming into compliance could include unbundling.[ing] default applications in the EU and activate[ing] device makers and mobile operators to decide which one to install, ”wrote Raymond James analyst Aaron Kessler in a note to customers Wednesday night. “While this could lead to a decrease in Google’s search revenue in Europe, we believe the losses would be minimal as Google has over 90% of the search share in Europe. “
The last time the EU fined Google – a $ 2.74 billion tax that was also the result of an antitrust ruling – the Mountain View, Calif., Company immediately recorded the full amount in its financial statements, even when she appealed. And as is likely this year, the fine dealt a substantial blow to earnings per share and net income of the company for the second quarter of 2017.
What to expect
Earnings: On average, analysts polled by FactSet model Alphabet for second-quarter earnings of $ 9.66 per share. Contributors to Estimize, who pull estimates from analysts, fund managers and academics, forecast adjusted earnings of $ 9.77 per share, on average. Again, these estimates do not reflect Android’s antitrust fine.
Sales: Analysts estimate, on average, Alphabet’s second-quarter sales to be $ 25.58 billion after factoring in traffic acquisition costs. The lion’s share of sales comes from the advertising activities of the Google company, Google Other (sales of computer hardware, cloud computing and sales of app stores) accounting for around 4.4 billion dollars. Other Bets is expected to generate $ 176 million in sales in the quarter. Estimize contributors are forecasting aggregate revenue of $ 25.8 billion for the quarter.
Movement of stock: Alphabet stock has gained 13% over the past three months, like the S&P 500 SPX index,
gained 3.7% over the same period. Alphabet shares have climbed 16% this year.
Of the 45 analysts who cover Alphabet, 40 rate the stock as the equivalent of a buy, according to FactSet. Five analysts rate the name as retained and none have a sales note. The average price target is $ 1,276.68, which is 6.5% above Thursday’s closing price.
What the analysts say: Amid the uncertainty of the EU decision, Barclays analyst Ross Sandler wrote in a note to clients on July 13 that he would “add positions in the second quarter.” Sandler’s reasoning is simple: He expects Alphabet to exceed the consensus on site revenues, traffic acquisition costs, and operating margins.
In a note to clients in July, Canaccord Genuity analyst Michael Graham wrote that the two areas investors should watch for revenue growth are the company’s “Properties” segment, which includes partnerships. search distribution, as well as sites owned by Google such as Gmail and YouTube. Alphabet does not break down YouTube’s revenue.
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“One of the most recent elements of recent success has been a rebound in computer search income,” Graham wrote. “While this has been a demand for the past two quarters, we are not sure that it has significant structural support going forward.” Graham has a hold rating on Alphabet shares with a target price of $ 1,050.
Susquehanna Financial Group analyst Shayim Patil wrote in a June note to clients that ad spend data appeared to meet his team’s expectations and that growth was being driven by product listing announcements – an area that Amazon.com Inc. AMZN,
mounted a challenge in – which Patil said was growing faster than overall ad spend growth.
Patil has the equivalent of a buy quote on the stock with a target price of $ 1,250.