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Google bullishness soars ahead of third-quarter results

Alphabet earnings on tap

Wedbush's James Dix cut his rating on Alphabet last month to a "sell," citing emerging competition that Google faces in search advertising.

Among Wall Street analysts, Dix is on an island. Some 42 of the 46 analysts (91 percent) tracked by FactSet recommend buying the stock, while three say investors should hold on to it.

The more popular view was expressed by Pivotal Research Group's Brian Wieser, who wrote this month that Google and Facebook are "unambiguously the hegemonic players in digital advertising." Wieser's $1,090 price target is the highest on Wall Street. Dix's is the lowest at $700.

Alphabet shares have gained 6.5 percent this year, closing on Tuesday at $828.55. Heading into its third-quarter earnings report on Thursday, Alphabet's stock market capitalization of $562 billion trails only Apple among the world's most valuable companies.

Once at risk of losing ground in the transition from web to mobile, Google has solidified its digital dominance through the Android operating system, growth of YouTube and investments in smartphone apps for maps, e-mail and photo storage. Meanwhile, Google commands over 95 percent of the global mobile search market, according to NetMarketShare, an even higher level of control than it has on desktops.

Revenue probably climbed 18 percent to $22.05 billion in the period from $18.7 billion a year earlier, according to the average estimate in a Thomson Reuters survey. Earnings, excluding some items, likely increased to $8.63 a share from $7.35.

Alphabet price targets

Alphabet's quarterly reports offer a regular reminder of what drives the Mountain View, California-based company.

While Google has held recent events promoting its cloud-computing platform, which competes with Amazon Web Service, and a new home-assistant device that's out to take on the Amazon Echo, advertising is still what matters for the company's financials.

Google's own websites have benefited from an increase in the number of text ads shown on mobile to three from two, and the company has even been testing searches with four ads on top. Ads within maps are contributing to growth, and Google has gotten a boost this year from the Olympics and U.S. elections.

Consumers shopping for sneakers, smartphones and handbags also see scrollable advertisements, called product listing ads (PLAs) on the top of the screens.

"Mobile search, PLAs and YouTube are all showing strength and we believe have plenty of headroom," wrote Rob Sanderson, an analyst at MKM Partners, in an Oct. 24 report. Sanderson recommends buying the shares and has a $935 price target.

The stock isn't cheap by historical standards. It's trading at 32.1 times earnings, higher than its average of 28.1 over the past five years, according to FactSet.

Wedbush's Dix sees risks ahead.

Here's how to play Alphabet ahead of earnings

Search, he argues, is giving way to more targeted forms of marketing. Increased data on how and where consumers spend money means that brands can reach spenders on their devices in other ways.

"Payments innovations should facilitate more seamless settlement of incentives," Dix wrote on Sept. 27.

But betting against Google has been a bad strategy of late. In addition to advertising strength and investments in big new markets, Chief Financial Officer Ruth Porat has been spending billions of dollars on share buybacks. Given how much cash Alphabet generates — $7 billion in free cash flow in the second quarter — money is plentiful.

Anthony DiClemente of Nomura Securities expects more returns for shareholders. He has a "buy" rating on the stock and a $925 price target, as of his latest report on Oct. 24.

"Our analysis shows that Alphabet could support a meaningful expansion of its buyback program," DiClemente wrote.

A high altitude WiFi internet hub Google Project Loon balloon is displayed at the Airforce Museum in Christchurch on June 16, 2013. Google revealed top-secret plans on June 15 to send balloons to the edge of space with the lofty aim of bringing Internet to the two-thirds of the global population currently without web access.
Marty Melville | AFP | Getty Images

Don't expect much from Alphabet's other bets — all the non-Google businesses.

Since creating Alphabet as a holding company last August to break out core Google from the so-called moonshots, the futuristic projects have been beset by high-profile executive departures. Craig Barrat, who ran Google's fiber unit for high-speed connectivity, became the latest to leave.

Barrat announced his departure in a blog post on Tuesday, and Bloomberg reported, citing a person familiar with the matter, that 9 percent of jobs are being cut. Barrat also said that the unit is going to "pause our operations and offices" in cities where it's been planning to expand.

Tony Fadell, creator of the Nest smart thermostat, departed that business in June, and Bill Maris, former head of the start-up investing arm GV, left the company in August. Also in August, Chris Urmson, the technology chief of Google's self-driving car project, stepped away, and just last week came the announced departure of Dave Vos, who was helping lead the drone program Project Wing.

For investors, other bets are currently just expensive investments. In the second quarter, the projects collectively generated $185 million in revenue and lost $859 million. Analysts polled by FactSet expect to see third-quarter revenue of $226 million.