GOOG Alphabet Inc

By Steven Russolillo 

Google parent Alphabet Inc. excels at many things. One at which it doesn't: playing Wall Street's expectations game.

Alphabet's earnings have fallen short of analysts' consensus estimates in eight of the past 12 quarters. That includes its earnings report in April, deemed such a disappointment that the stock fell 5.4% the following session.

Yet Alphabet's march higher in recent years shows how shortsighted such reactions can be. That bears remembering since there is a lot to like about Alphabet that appears to be underappreciated by the market ahead of Thursday's earnings report.

Analysts polled by FactSet estimate second-quarter adjusted earnings of $8.04 a share, up 15% from a year ago. Net revenue excluding traffic acquisition costs is expected to have increased 17% to $16.9 billion.

Underneath those rosy figures is a solid core business. Google's lucrative search-advertising business is humming along and it is capitalizing on the shift from desktop to mobile use.

Furthermore, to the delight of some shareholders, Alphabet is actually showing some spending restraint, at least by its own standards. Paid clicks, which measure the number of clicks Google gets on its ads, are forecast to have increased by 25% in the second quarter from a year ago.

Google will likely get more than half of its advertising revenue from mobile this year for the first time, according to data provider eMarketer. And overall, it has cornered about one-third of the global mobile-ad market, nearly double that of the second-biggest player, Facebook Inc., eMarketer estimates.

This all comes as spending appears to be in check. Total operating expenses were about 36% of net revenue in the first quarter, in line with its average over the past few years. More significantly, capital expenditure is expected at 15% of net revenue this year, down from about 20% in 2014.

After so much talk of science projects such as driverless cars and robots, that restraint may soon get investors' attention. After a sharp rally in 2015, Alphabet has struggled this year relative to rivals. Fetching just 20 times projected earnings over the next 12 months, its multiple is identical to the Nasdaq Composite and cheaper than Facebook's.

This bet isn't such a moonshot after all.

(END) Dow Jones Newswires

July 27, 2016 15:59 ET (19:59 GMT)

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