This week Alphabet (GOOGL) was upgraded to an A rating, which translates to a Strong Buy by the POWR Ratings system. This is a result of a strong Q1 earnings reports, increased earnings estimates, improving valuation, and strong growth.

The POWR Ratings is calculated by analyzing 118 different factors – each with its own unique weight. A-rated stocks have an average annual performance of 30.7% which compares favorably to the S&P 500 at 7.3%.

The POWR Ratings also analyze stocks based on different categories to provide additional insight for investors and help them make better decisions. Scores are updated daily, and upgrades and downgrades are often a meaningful signal. Now, let’s look at some of the catalysts driving improvements in GOOGL’s outlook and POWR Ratings score.

Strong Q1 Earnings Report

Earnings reports are one of the most powerful forces impacting a stock price. In Q1, GOOGL’s earnings topped expectations on the top and bottom-line by a significant margin. The company generated $26.29 in earnings per share, topping analysts’ forecast of $15.82 per share. Revenue came in at $55.3 billion, exceeding expectations of $51.7 billion.

Ad revenue makes up a significant portion of the company’s revenue. Its results showed an increase in the number of ads delivered and revenue per ad. It also shows that the company is benefitting from faster economic growth as businesses are spending more on online advertising.

Two of the company’s faster-growing units – YouTube and Google Cloud – also delivered growth above expectations. YouTube ad revenue increased by 49% to generate $6 billion. Google Cloud revenue increased by 46%.

Earnings Estimates Hiked

GOOGL’s earnings estimates have continually trended higher over the past year and have exhibited a sharp uptick in the past couple of months.

Over the last 12 months, 2021 consensus EPS has risen from $55 to $87 and 2022 EPS estimates have risen from $65 to $95. About a quarter of this rise has come following its latest earnings report which caused analysts to hike estimates even more.

The analyst community is also bullish on the stock as 29 out of 30 analysts covering the stock have a Buy rating. Currently, they have a consensus price target of $2,760, implying a 20% upside.

Valuation Improving

Since reporting earnings, Google is up 3.4%. However, its valuation has improved due to its earnings estimates being hiked by 12%. Thus, Google’s forward price-to-earnings ratio (P/E) has dropped from 28 to 25.

The company also has a considerable moat given the network effects of its business and dominance of large, expanding markets with Google search and YouTube. In search, it has 92% of traffic, and 73% of online videos with YouTube.

Rising Growth Score

Google’s Growth score has increased by 120% since January 15th. This is a meaningful development especially since Google’s revenue growth had trended lower from 25.8% in Q1 2018 to -1.7% in Q2 2020.

However, in the last 3 quarters, it has seen an acceleration to 34.4% growth in the last quarter. It also seems very likely that if forecasts for strong economic growth above 5% are correct then it bodes well for the company in terms of increasing ad sales. Another tailwind will be the return of the travel and tourism industries as the world slowly normalizes.

Conclusion

GOOGL is an A-rated stock which puts it in an elite category. The recent earnings report confirmed that the company’s revenue growth trajectory is intact. Companies like Google with accelerating revenues and high margins can result in multiple expansion – further fueling gains in stock prices. 

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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com.  Jaimini has been dialed into the hottest trends in investing:

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GOOGL shares were trading at $2,324.48 per share on Wednesday afternoon, up to $17.65 (+0.77%). Year-to-date, GOOGL has gained 32.63%, versus an 11.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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