Earlier this week, we received earnings results from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). The company beat on earnings-per-share and revenue results, but GOOGL stock fell slightly. Shares are now down about 4% on the week after bouncing off Thursday’s lows.
What should investors make of GOOGL stock now? I think the bigger question is, what’s the market going to do? All indicators point to a recovering economy and strong business environment.
However, on Thursday, a possible crack came through. The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) dove suddenly around midday. The ETF recovered more than half its losses to close down 0.63%. But it showed how quickly the market can unravel despite no news.
Alphabet, Apple Inc. (NASDAQ:AAPL), Nvidia Corporation (NASDAQ:NVDA) and countless others were taking it on the chin for no apparent reason. My concern is that, coming into the potentially volatile late-summer/early-fall period, there could more declines in store.
GOOGL Stock: Google and YouTube
For starters, Alphabet own’s the world’s two most popular sites — Google and YouTube. Because of these properties, the overall business remains in good shape. Paid clicks climbed 52% year-over-year and 8% sequentially. YouTube users now watch an average of one hour of videos per day, a rather startling figure when you think about it. (Seriously, who has time for that?)
Additionally, YouTube TV has launched. At $35 per month, users get unlimited DVR cloud storage and live-streaming access to more than 40 channels. When it first launched, it was only available in five markets: New York, Los Angeles, the Bay Area, Chicago and Philadelphia. That list has since grown, as I found out my local area now has it, too. It’s now available in additional cities like Atlanta, Dallas, Detroit, Houston, D.C., Phoenix and others.
According to recent reports, it also has more than 2 million app downloads. Unfortunately, downloads don’t translate one-for-one to subscribers. But it gives a sense at the curiosity consumers have around the service and potential demand. It’s also positive given that YouTube TV only launched about three months ago.
Alphabet: Under the Hood
Getting back to the overall business, investors likely nitpicked three issues in Q2: cost per click (CPC), traffic acquisition cost (TAC) and an EU fine of $2.7 billion. The EU fine was a direct hit to earnings, but investors knew it was coming. Still, this cut into net income by nearly 50% for the quarter. Ouch.
On the CPC front, prices fell by 23%, widening from the the 19% decline in the first quarter. This is a trend, so investors weren’t too taken aback. If this were the only issue — after all, paid clicks and revenue were up 52% and 21% YoY, respectively — the stock likely wouldn’t have fallen.
However, there was more. TAC came in at $5.09 billion, outpacing revenue with 28% growth. This figure also came in ahead of analysts’ expectations of $4.74 billion. Again, this is a trend and we know higher costs come with growth. But its growth was a little too fast.
While these may seem like concerning issues, the business is doing just fine. Earnings and sales continue to head higher at a double-digit pace. Did we mention Alphabet has $94.7 billion in cash and short-term investments? Admittedly, operating margins did slip a bit, from 28% to 26%.
“Other bets” saw revenue climb 34% to $248 million, while losses shrank to $772 million from $855 million one year ago. For those that criticize its “Other Bets” division, consider that’s how GOOGL ends up with units like Waymo. Some analysts have put a value of $70 billion on this business alone.
From CFO Ruth Porat: “With revenues of $26 billion, up 21% … we’re delivering strong growth with great underlying momentum, while continuing to make focused investments in new revenue streams.”
Trading GOOGL Stock
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GOOGL stock has plenty of support, starting at $940 and $920 (purple lines). These levels continue to be tested, which could lead them to break as Alphabet struggles with $1,000. However, the 100-day moving average also sits between these levels, which could provide further support.
Finally, once GOOGL stock broke over previous trend resistance (blue line), it then acted as support in late-June. As it stands, this too sits between $920 and $940.
This wasn’t the best quarter from Alphabet, but it was a pretty good one. If investors are itching to go long, they have plenty of reasons to do so. If they can start a position in GOOGL stock in the low $920s, it’s worth it. As others have pointed out, GOOGL stock doesn’t usually stay down for long.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
