[Click e-Stock] Ahead of Alphabet's Q3 Results... What Are Market Expectations?

Ahead of Alphabet's third-quarter earnings report, scheduled for October 27, Daishin Securities maintained its Buy rating on Alphabet Class A shares. Key points to watch include growth in the cloud business and the cash burden from investment in AI infrastructure.

According to Daishin Securities on October 20, how quickly its backlog converts into revenue will be a gauge of the sustainability of Alphabet's growth. In the second quarter of this year, Google Cloud revenue was $24.8 billion and operating income was $8.8 billion, lifting its operating margin to 35%. Its backlog rose 11% from the previous quarter to $514 billion.

Alphabet's management previously said that expanded use of third-party infrastructure could weigh on cloud margins in the third quarter. How much margins decline from the previous quarter is a key point of sensitivity.

The financial burden from aggressive investment in AI infrastructure is another major variable. Under Alphabet's guidance in the second quarter, annual capital expenditures were projected at $195 billion to $205 billion, marking a rise for six consecutive quarters. As a result, free cash flow (FCF) turned negative, with a deficit of $5.9 billion. To make up for the cash shortfall, the company issued additional shares and bonds, causing long-term debt to nearly double from $46.5 billion to $98.2 billion.

Daishin Securities forecast Alphabet's third-quarter revenue at $121 billion to $127 billion and adjusted earnings per share, excluding valuation gains and losses, at $2.80 to $3.20, in line with market expectations.

Cho Jaewoon, a researcher at Daishin Securities, said, "The market is looking upward but has also kept downside protection in place." He added, "JPMorgan raised its price target from $420 to $425, while UBS lifted its target from $379 to $380. More trades are betting on a rise (the put-call volume ratio is 0.55), but put options, which protect against losses in the event of a sharp share-price decline, are trading at a premium (the 25-delta skew is 13), showing that demand for protection remains."

This content was produced with the assistance of AI translation services.