What Alphabet’s Chart and Fundamentals Say Ahead of Earnings

25 Eki

"Magnificent Seven" member Alphabet GOOG GOOGL is set to report the firm's third-quarter results next Tuesday (Oct. 29) after the bell. What does the company’s technical and fundamental analysis say about where shares could be going heading into earnings and beyond?

Let’s check it out:

Alphabet’s Fundamental Analysis

Consensus up and down Wall Street as I write this is for Alphabet to report $1.84 of GAAP earnings per share on $86.25 billion of revenue.

That would compare well to GOOGL’s year-ago EPS of $1.55, while also reflecting 12.5% in year-over-year sales growth -- more or less in line with Alphabet's annual revenue growth since mid-2023.

However, next week’s earnings could be a potentially tough release for the search-giant-gone-AI company, which also counts YouTube among its businesses and relies on advertising to produce revenue and cash flows.

This time around, Alphabet is facing a blizzard of concerns over its AI-related capital expenditures, as well as over the pertinent regulatory issues.

After all, GOOGL’s capital spending vaulted to $13.2 billion in the second quarter from $12 billion three months earlier.

Meanwhile, a court ruled in August that Alphabet's core Google unit constitutes a monopoly in general search services and text advertising. The U.S. Justice Department has even suggested breaking up the company into smaller businesses.

Such concerns might explain why GOOGL currently trades at a seemingly inexpensive 21 times or so of its estimated forward earnings. By contrast, forward price-to-earnings ratios for other Magnificent 7 stocks as I write are much higher, including:

-- Amazon AMZN, 40x

-- Apple AAPL, 35x

-- Microsoft MSFT, 32x

-- Meta Platforms META, 27x

In other words, investors have assigned a lower valuation to Alphabet than they have to many of its Mag-7 rivals.

Alphabet’s Technical Analysis

Now let’s look at Alphabet’s year-to-date chart:

This chart shows that GOOGL developed a so-called “rising wedge” pattern (the purple lines in the chart above) from late January into early July.

That’s historically a pattern of bearish reversal, and that’s exactly what happened to Alphabet. The stock peaked at $191.75 intraday on July 10, then pulled back beginning in mid-July and has yet to fully recover.

Now, that doesn’t mean nothing constructive has happened for Alphabet since July. Since GOOGL began its pullback, the stock also formed what’s known as an “inverted head and shoulders” pattern, denoted with the green lines above. That’s traditionally a bullish set-up.

But there’s one catch -- GOOGL is still working on taking the inverted-head-and-shoulders pattern’s pivot point, also known as the “neckline.” That’s right around $170, but Alphabet was only trading at $162.84 as of Thursday afternoon (Oct. 24).

And oddly, Alphabet has seemed to lose some pizzazz of late with investors. The stock has traded more or less sideways since Oct. 15, forcing GOOGL’s Relative Strength Index (the gray line in the chart above) towards neutral.

The sideways move has also smoothed out Alphabet's daily Moving Average Convergence Divergence (MACD), denoted by the gold and black lines and blue bars at the bottom of the chart.

So, while Alphabet’s chart is showing a seemingly bullish inverted-head-and-shoulders pattern as GOOGL moves towards earnings, the stock’s daily MACD looks less optimistic.

The MACD isn’t really bullish or bearish overall, but the histogram of GOOGL’s 9-Day Exponential Moving Average (the blue bars above) has edged into negative territory.

Meanwhile, GOOGL’s 12-Day EMA (the black line above) has slipped below the 26-Day EMA (the gold line), which is historically interpreted as a bearish set-up. This puts pause in the optimism that I first had in seeing GOOGL’s trading pattern.

Add it all up and Alphabet could certainly see a post-earnings breakout -- but if the firm doesn’t send the right signals in answer to investor concerns about capital expenditures and other fundamental issues, anything could happen.

(Disclosure: Moomoo Markets Commentator Stephen “Sarge” Guilfoyle was long Amazon and Microsoft as of the time of writing this column.)

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