Out of all the mega-cap tech giants, Alphabet (GOOGL) has been 2021’s best performer. The share gains have piled up, with the stock showing year-to-date returns of 44%, far above the S&P 500’s 15% uptick.
Heading into next week’s Q2 earnings (Tuesday, July 27), BofA’s Justin Post believes all the signs are there for Alphabet to deliver the goods. In fact, GOOGL is Post’s preferred “2021 value/recovery stock.”
“We continue to rate Google as our top FANG pick given exposure to cyclical recovery and easier 2H comps vs DR social advertising companies (we also see upside potential to 3Q GOOG estimates),” said the 5-star analyst.
Post expects GOOGL’s revenue to be in-line with Street estimates but calls for EPS of $20.15, above the consensus forecast of $19.21, citing “more asset value appreciation,” as the reason for the projected EPS upside.
According to channel checks, search ad recovery continued in the quarter and the analyst anticipates search revenue growth of 49%, amounting to sequential acceleration of 19pts “on a 19pt easier comp.” Acceleration is also expected from YouTube ad revenue, which is estimated to hit 69%, compared to 49% in the first quarter.
For the Cloud segment, Post believes “incremental margins will continue to improve,” and anticipates 47% growth, a modest 1% improvement over Q1’s display.
Amongst Google’s non-ad segments, Post sees Cloud as “driving the most new value creation,” and thinks Google Cloud growth vs rivals AWS and Azure will be “important for sentiment.”
Looking ahead, Post’s main worry for the stock is that 2Q will be an “as good as it gets quarter.”
In 2H, the analyst anticipates a year-over-year slowdown in revenue growth “on tougher comps,” whilst also expecting year-over-year margin trends to be “less positive” than in Q2.
Lastly, Post says investors should watch out for management’s “tone” on expectations for the year’s second half, which could be a “key driver” for stock.
“While we expect management to try to manage 2H expectations, since Sundar Pichai has taken over as CEO, Alphabet has had more focus on maintaining positive investor sentiment, in our view,” Post noted optimistically.
All in all, there’s no change to Post’s rating, which stays a Buy, or price target, which remains at $2,755. Investors are looking at upside of 9% from current levels. (To watch Post’s track record, click here)
It’s clear GOOGL stock remains a firm favorite on Wall Street; based on 26 Buys vs. 2 Holds, the stock has a Strong Buy consensus rating. The forecast calls for 12-months upside of ~7%, given the average price target currently stands at $2,834.74. (See GOOGL stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
