Which Stocks Are Cheap Before Earnings Tomorrow?

Earning season has officially started and we have some major companies reporting their earnings this week. So, in today's video, I want to give you my opinions on these businesses and their share prices and ultimately their valuations before they report earnings to ultimately show you which stocks I think are looking the most attractive and which ones I think may be looking quite expensive. Now, if you're new to my channel, then you should also know that I try to do as many earnings analysis videos as I possibly can during earning season. So, if you would like to stick around and see all of my earnings analysis videos, then make sure you hit that subscribe button. So, let's start right from the top and discuss Google's earnings. And they are expected to report tomorrow on Wednesday after the market closes. So, what I want to do is run through their last quarter earnings report, then take a look at what analysts are expecting for this quarter and ultimately give you my opinion on their valuation. So, let's take a look at the highlights from their most recent earnings report now. All right. So, in this first screenshot, we can see that the last quarter for Google was very strong. They posted 19% revenue growth in search and their other businesses, then 63% year-over-year cloud revenue growth, and Google had by far the best quarter out of all of the hyperscaler cloud businesses. It was a silly quarter. Then, we can also see that Google now has over 350 million paid subscriptions across Google 1, YouTube, and their other subscription services. Now, moving on to the next screenshot. This is their income statement from the last quarter. And here we can see that overall revenue was up 22%. Operating income was up a whopping 30% and Google also reported a $37.7 billion gain from other income which was their gains on investments. And this made their earnings increase by a total of 81% in the first quarter. Now these gains were largely from Google's investments in Anthropic and SpaceX. And with SpaceX IPOing now, it could lead to a lot more gains for Google. But it could also make Google's earnings be quite volatile as now they're going to have to report the quarter-to- quarter impact and share price swing in SpaceX now that it is publicly traded. So that's just something to take note of. So what I like to do is actually factor out the gains on investments since I view them as kind of volatile and more one-time noise, if that makes sense. So, the earnings per share without these gains would have been about $262 based on analyst adjustments, which is quite a bit lower than the $511 they reported. In the trailing 12 months, without these gains on investments, Google's earnings would also be around $120 billion. Now, so when I'm taking a look at the price to earnings ratio of the business, I'm going to be using that $120 billion figure. Moving on, here we can see that growth is accelerating for Google. Last year in the first quarter, they had 12% year-over-year revenue growth. And in the first quarter this year, again, they had 22% growth. And it's very nice to see that Google's overall revenue is accelerating, especially when they're doing over 100 billion in quarterly revenue. Now, that is pretty incredible. What's also incredible is Google expanded their operating margin to 36.1%. And again, operating income was up 30% year-over-year. This next screenshot quickly shows us that Google search revenue was up 19%, network revenue was down 4%, YouTube ads revenue was up 11% and subscription revenue was also up 19%. Then we can see that the operating margin of these businesses increased to 45.3% versus 42.3% last year. So Google expanded its operating margin from its core businesses by about 3% on a year-over-year basis. Now, as I said earlier, Google Cloud had a ridiculous quarter last quarter with revenue growing 63% and the operating margin nearly doubling to about 33%. Which ultimately led to Google Cloud's operating income more than tripling to about $6.6 billion. The last video that I posted on my YouTube channel was from an interview of Larry Frink and he said that he has been talking to all of the hyperscaler CEOs and they have very clearly told him that they are still capacity constrained. Demand is accelerating and they cannot meet all of it. So across the board I think that the hyperscalers and the cloud businesses are going to have a very strong Q2 and I think Google is going to prove that right tomorrow. But moving on, this next screenshot shows us Google's cash flow statement summarized. And here we can see that operating cash flow grew by 27% year-over-year, which is very nice to see. However, capex is up 107%, which means that free cash flow declined by 47%. And in the trailing 12 months, free cash flow is also down 14%. And this is the story across all of the hyperscalers right now. Their operating cash flows and revenues are growing very well. Again, Google's is up 27%. But they are investing a significant amount of capital back into capex and a lot of the hyperscalers are actually projected to be negative free cash flow next year. And I have seen a lot of investors on social media say that this is a massive red flag because these business's profitability is going down. But personally, I think that this is kind of short-term focused because these businesses are clearly in this massive capex cycle where they're not focusing on prioritizing free cash flow. What they're focusing on is capturing all of the demand from artificial intelligence and that's what they're doing with their cloud businesses. So, what I am focusing on during this period is I want to see their revenue growing because that kind of suggests that the investments they're making are actually expanding and growing the top line. And across the board, the hyperscalers are seeing their revenues actually accelerate, which I think is a reflection that their capex is paying off. And then second, I want to see the operating cash flow growing because this is the actual amount of cash that these business's operations are producing. So if they're investing in capex, then I want to see their operations producing more and more cash, which we can see with Google, they actually increase their operating cash flow by 27% year-over-year. So to put that simply for all of the hyperscalers right now, I think that focusing on free cash flow is the wrong move because all of them are going to look very expensive if you do that. And again, it's not what these companies are prioritizing. So for now, I like to see that the operating cash flows and revenues for these businesses are accelerating and growing very strong. All right, so now let's head over to Stock Unlock really quickly and let's take a look at what analysts are expecting for Google's upcoming quarter now. And here we can see that on average analysts are expecting about $120 billion in revenue, which would be revenue growth of about 24.8% on a year-over-year basis. So analysts are currently expecting Google's revenue to actually continue accelerating all the way up to nearly 25%. If we take a look at earnings per share estimates, the average is about $3 per share or about 29% year-over-year growth. So it looks like analysts are expecting Google to have another pretty stellar quarter of nearly 30% earnings growth. However, as I said earlier, Google in the trailing 12 months has really done about 120 billion of earnings. So if we divide their current market cap of 4.25 trillion by 120 billion, then we get a price to earnings ratio of about 35.4. This is excluding Google's one-time gains on investments. And this is what I think the business is more realistically selling for today is about 35 times earnings. And if we take a look at Google's historical price to earnings ratio, we can see that this is actually on the high end. And over the past about 6 years, the highest they traded for was a 35.4 PE in 2021. So Google is right near its historical high price toearnings ratio. On a forward price to earnings ratio, they are trading for about 26 times forward earnings, which again is on the high end today. So, I think that Google stock is arguably looking more expensive. Again, trading for about 35 times trailing earnings and about 26 times forward earnings. All right. Now, I run a quick DCF on Google and I'm using the analyst estimates for earnings over the next 5 years. And analysts have Google growing its earnings by about 21% per year again over the next 5 years. I also have Google trading for about 25 times earnings, which is much more in line with how the stock has historically traded. and a 25p is actually slightly above the company's long-term average. So, I am saying that Google will continue to trade above its historical average multiples. Now, in this DCF, we get a compounded annual growth rate to the share price of about 13% annually, a fair value of about $397 per share, which is about 15% above where the stock is currently trading, and a future stock price of about 635 bucks, which is 84% total returns over the next 5 years. So, I do think that Google stock is looking fairly valued to slightly undervalued if they can actually hit analyst estimates over the next 5 years. However, in my portfolio, I like a little bit more of a margin of safety and a 13% compounded annual growth rate isn't what I really aim for personally. I want a little bit more than that. So, for myself, I am not interested in Google stock here. However, if the stock does sell down or correct for any reason, then I could become much more interested in it. But again, at a 13% compounded annual growth rate over the next 5 years, I simply think that there is more value in the market today. Even though Google is a very highquality business, I simply think that the price is now reflecting that and the stock is not really selling for a discount before earnings. So, with that being said, let's now move on to the next stock, which is Service Now. All right, so just like last time, let's start off by taking a look at the highlights from the most recent earnings report. And what I like to focus on is the constant currency numbers because it removes the headwinds or tailwinds from currency impacts. And here we can see that on an FX neutral basis, Service Now's revenue grew 19% year-over-year. Its current remaining performance obligations were up 21% and its total RPOS were up 23%. So this was a very strong quarter from Service Now in my opinion. This next screenshot shows us Service Now's guidance for the second quarter and for the full year of 2026. Now, in the second quarter, they're expecting 21% constant currency revenue growth, which would actually be an acceleration from their Q1 numbers. For the full year of 2026, they are expecting about 21% constant currency revenue growth, which again would actually be an acceleration from the 19% growth they posted in Q1. So, these numbers right here are strong in my opinion. But what the market did not like is the 19.5% current remaining performance obligations guidance growth as it does suggest that future revenue growth potentially in 2027 could decelerate below 20% again. And this is potentially an issue because revenue growth has been consistently decelerating for Service Now for well over a year now. And we can see that over pretty much every period over the past year, revenue growth rates have been decelerating from about 23 to 25%. Down to about 19 to 20%. Now, in my opinion, I don't think that this is a huge red flag because as businesses grow, they naturally decelerate. This is the law of large numbers. 20% annual growth forever is extremely challenging to maintain and I wouldn't be surprised if over the longer term Service Now's revenue growth rates do continue to decelerate and as an investor I'm not really scared of this and I don't think that it's necessarily a bad thing or again a huge red flag. Moving on through their earnings here we can see that the average revenue per user is still growing and hit $14.9 million as of the most recent quarter. The number of customers with over $5 million in spend with Service Now on an annual basis is also continuing to grow to 630. So this slide right here shows us that customers are spending more and more with Service Now over time. And I believe that this is an indicator that the business does have a moat and it also shows that the business is not being disrupted by artificial intelligence. However, this next slide shows us that Service Now's retention rate did fall by 1% to 97% though, which is not ideal to see. This is a number that I am going to be keeping my eye on because higher churn could be a sign of disruption starting or the mode of Service Now starting to weaken. However, a 1% drop in retention rate on a quarter-over-quarter basis is not a massive red flag. What would start to worry me though is if this starts to drop to 96 to 95 to 94% over the coming quarters. What I would love to see is this get back up to 98 to 99%. As that would show us that customers are remaining and retaining at their historical average rates. This next slide shows us another thing that the market did not like about the last quarter and that's that Service Now's gross margins fell to 79.5%. Which I believe was the first time that their non-GAAP gross margin fell below 80%. And you can also see that in the first quarter of 2025, last year, the adjusted gross margin was 82%. So just over one year, the gross margin fell by 2.5% which is a pretty large drop. I believe that this is due to higher token and AI cost though because AI costs are a cost of goods sold, which does impact the gross margin. Whereas usually with software companies, their expenses impact operating margins, not gross margins. But token spend is causing software companies to have to spend more again on the cost of goods sold. So I do think that is impacting gross margins for a lot of these software companies. But in my opinion, the key number to actually look at is the profit margins or the free cash flow margins. That is the true profits of the business. And as we're going to see, Service Now's is remaining steady. But before we get there, really quickly, I want to show you that Service Now is expecting its revenue to double by 2030 to $30 billion. And this is their base target. So that is what I am going to use in our DCF here in a minute. But before we get to the DCF, I want to take a look at some of Service Now's metrics. And here we can see that its revenue is consistently growing. This is a beautiful revenue growth chart. Every single quarter, this business is continuing to grow its revenue, and it is still growing by 20% per year, and it has now produced about $14 billion in the trailing 12 months. Service Now's free cash flow is not growing as consistently, but it still hit $4.6 billion in the trailing 12 months. And you can clearly see that over time this company is producing more and more free cash flow. Now, as I said earlier, the main profitability metric that I think investors should be focusing on is the free cash flow margin. And in the trailing 12 months, it is still sitting at 33%, which is actually above their long-term average. So, even though the gross margin for the business did decline by 2.5% on a year-over-year basis, the actual profit margins for the business are still growing and uptrending, which is great to see and also suggest that Service Now's profitability is actually growing. So, let's now take a quick look at Service Now's price to free cash flow. And we can see that it's sitting all the way down here at about 22.7. And if you take a look at how this company has historically traded, it is very clear that this is a low price to free cash flow relative to how the market has historically valued this business. Also, a 22 price to free cash flow for a business that is consistently growing at stopline by about 20% and projecting to double the business over the next 5 years, I think, is a pretty low multiple. So, I do believe that Service Now stock is looking undervalued and pretty dang attractive here. But let's quickly do a DCF on Service Now as well. So over the next 5 years, I'm saying that they will grow their free cash flow by 18% annually, which brings them to about $10 billion in free cash flow by the end of 2030, which I believe is what the company is currently projecting. So this is in line with their own projections. I'm also saying that the stock will continue to trade for a price to free cash flow of about 23, which factors in pretty much no multiple expansion over the next 5 years. This DCF is kind of obvious, right? If you have no multiple expansion and 18% annual free cash flow growth, then the stock should compound by about 18% annually over the next 5 years. This would also give it a fair value of 145 bucks and a future stock price of $234, which would be a total return of about 130% over the next 5 years. Now, this DCF I think is arguably pessimistic because if we take a look at Service Now's price to free cash flow, this thing was routinely trading for 40 to 30 times cash flows before the SAS apocalypse. So, if they can even get their multiple back up to 25, then the stock produces a 20% compounded annual growth rate over the next 5 years if they can meet their projections. And I don't think that this is very unrealistic. So, in my opinion, I do think that Service Now stock is looking undervalued in the market. if they can meet their projections and if they can at least maintain a 23 price to free cash flow, which I believe this business will do, especially if they can continue to prove that they're not being disrupted by artificial intelligence and their business can continue to compound by about 20% annually. A lot of the software companies in the market have been hit so hard over the past year and have sold off by over 50%. But what I have noticed is the market likes to sell first and then ask questions later. And what I mean by that is the market sold off nearly every software stock altogether. And what I think is going to happen is some software companies are going to be impacted from artificial intelligence and it could disrupt their businesses. But I don't think that every software company is doomed. Service Now I think is one of the companies that could actually benefit from AI and is not going to be disrupted. So over time as they continue to prove that through the underlying fundamentals continuing to grow, I think the multiple could reexpand up to 25 to 30. And if that happens then the returns to the stock could be pretty large. So then the obvious question is am I buying service now before earnings? And the answer is no. And the main reason is because I already have a lot of software in my portfolio. As I have shared on my channel previously I own constellation software and its family of stocks. So constellation software, Tikis and Signity are the three constellation family stocks that I own in my portfolio and they make up a pretty decent portion of my portfolio. So to put that another way, I believe that I already have enough software in my portfolio and I'm happy with my software allocation. I also believe that the Constellation family are some of the highest quality stocks in the entire market. I made some videos on those stocks before and I will be going over their earnings too. But overall, I believe that I have enough software in my portfolio already and I have more conviction in those names. So I'm not looking to increase my software allocation. But again, I do believe that Service Now is offering value before earnings and if they can meet their targets, then yeah, I think that the stock is going to continue going up over the longer term and over the next 5 years. I simply think that SAS cannot remain down forever if their fundamentals can continue to compound by about 20% annually. Eventually, investors are going to have to wake up and say, "Well, all right, these things aren't being disrupted. Let's buy back in." So, I just think it's a matter of time until these businesses see their multiples reexpand once again. But with that being said, let's now move on to the third stock that I want to cover in this video, which is Tesla. Tesla also reports its earnings on Wednesday after the close along with Service Now and Google. So, Wednesday is going to be a very exciting day. And let's hop in to Tesla's most recent earnings report now. All right, so for Tesla, I only have a few screenshots, so let's run through them quickly. In this first screenshot, we can see that Tesla grew its automotive revenues by 16% year-over-year last quarter. However, its energy generation and storage revenue was down 12%, but its services and other revenue was up a whopping 42%. The company overall saw 16% total revenue growth, 50% growth to its gross profits, and its operating income was up 136% year-over-year. Operating cash flow was up 83% and free cash flow was up 117%. And honestly, this was not a bad quarter for Tesla at all after the company has had a long streak of having pretty subpar quarters. The numbers that Tesla has been putting out for the past 3 years have been very underwhelming and it seems like the trend could finally be changing for this business. This next slide shows us some of the main KPIs for Tesla's business and how they have been developing. So, the first one is the vehicle deliveries. And over the past 3 years, you can see that the vehicle deliveries have been downtrending on a trailing 12 months basis. And this is what I mean. Tesla has been reporting some pretty subpar numbers for 3 years now. However, the company's operating and free cash flows look like they are starting to uptrend again after being pretty volatile and not really growing for the past 3 years. However, net income and IBIDA are still downtrending on a trailing 12-month basis. But who knows, maybe this quarter is the start of a brand new uptrend. because you can see in the most recent quarter, IBIDA did in fact grow. But again, overall, when you take a look at these three charts, the past 3 years for Tesla hasn't really been that stellar. So, let's quickly head back over to Stock Unlock, and I want to show you some of Tesla's different metrics here. So, here we can see that in the trailing 12 months, revenue is now at about $98 billion. However, revenue has been flat since about the third quarter of 2023. So revenue over at Tesla on a trailing 12 months basis is still flat, but it could look like things are starting to uptrend again. Finally, the gross profits for the business actually topped out in the fourth quarter of 2022. And then for the past about 4 years, they have been downtrending. However, in the past two quarters, gross profits have finally been starting to grow once again. So, we're going to have to see if this trend does continue. But overall, the gross profits are down since 2022. Operating income over at Tesla has been falling off of a freaking cliff. Operating income topped out in the fourth quarter of 2022 at about 14 billion and it has declined by about 9 billion over the past 3 years to about 4.8 to 5.3 billion now. So on an operating income basis, Tesla still has a lot of freaking work to do. This is the same story for Tesla's earnings as well. They topped out at about $15 billion in the fourth quarter of 2023 and since then earnings have fallen off of a cliff and in the trailing 12 months they've now done about $4 billion of earnings. So what we have seen so far is that Tesla's revenue has been flat but its gross profits, operating income and net income have all been declining for the past 3 to four years. So, I think it's pretty fair to say that Tesla's underlying fundamentals have been underwhelming and not that stellar for the past few years, which would be completely fine, by the way, if the stock were not trading for extremely high multiples already. If we take a look here, Tesla's price to sales ratio is at 14.5. This is a higher price to sales ratio than a lot of software companies trade for, which are highly profitable and growing their cash flows and earnings by 20% plus annually. A 14.5 price to sales ratio for mostly an automotive company with low margins is extremely high. Tesla's price to earnings ratio is at 367. Its price to operating cash flow is at 85.9. Its forward PE is at 170. Its price to IBITA is at 122 and its price to free cash flow is at 203. These are extremely high multiples for a company that hasn't really grown its revenue over the past three years and its underlying profits have been consistently declining for 3 to four years now. And my main gripe with Tesla stock is I don't think its valuation is reflecting its underlying fundamentals of the business today at all. And every time I talk about Tesla on my channel, I get people in my comments that say, "Well, you have to invest in Tesla for the future. This is going to be a robotics company. It's going to be an AI company. And you can't look at the business's fundamentals today to value it. I can buy that. I can buy that it's not an automotive company, especially with its energy business and service businesses continuing to grow. But what you have to understand is you are paying for those new business lines and robotics and everything to work out and be extremely profitable in the future. you are already paying for those businesses to be a success today because the valuation of the company is so much higher than what the fundamentals are today. And again, what that ultimately means is you are paying for so much future success. You are not paying for what the company is today. You are paying for what the company could potentially be in the future. And that is where the risk is because if those future business lines don't work out and if they are not highly profitable then the stock looks massively overvalued today because you're paying for that success today. So again if that success doesn't happen then the stock has only one way to go and it's down. And that is why I think Tesla stock looks so risky is because you're paying for so much future performance and for these things to work out and they have no guarantee of doing so. So, in my opinion, I still continue to think that Tesla stock looks massively overvalued and extremely risky, and it's not a stock I am looking to invest in. With that being said, the most recent earnings report did look pretty strong, but not nearly justifiable for the company's valuation today. So, I hope that they have another strong earnings report, but I'm not even going to run a DCF on this one because it's just going to show that the stock is massively overvalued. And I do agree. So, I'm not looking to buy Tesla before earnings. And I also think that Tesla trades off of how much hype Elon Musk can generate. So what really matters here is whatever he says in the earnings call. However excited he can get investors on the earnings call is what's going to determine where the stock goes. So it's not attached to fundamentals right now. So we're going to have to see what Elon says on the earnings call. And with that being said, that is what I think about these three companies before they report earnings tomorrow. And I'm going to do my best to cover Google and Service Now's earnings tomorrow after hours on my channel. So, make sure to subscribe to my channel if you want to see those earnings videos. If you enjoyed this video, then please remember to leave a like on it as well. And as always, thank you so much for tuning in. I truly do appreciate it. And I hope to see you tomorrow in my Google and Service Now earnings