Tech behemoth Alphabet Inc (NASDAQ:GOOGL) reported second-quarter earnings on July 24, and since that time GOOGL stock has fallen more than 5%.
What’s more, Alphabet’s Q2 earnings results weren’t bad. In fact, they beat expectations.
It’s at this point you have to ask yourself whether Wall Street’s worries are overdone and if buying GOOGL stock on the dip is a good idea.
Too Big to Succeed?
One of the main concerns among investors this quarter was the $2.7 billion fine GOOGL paid to the European Commission due to allegations of unfair business practices. Not only did the fine reduce Alphabet’s operating income by a whopping 40%, but it set a precedent that investors are wary about.
For one, there’s the worry that this is just the beginning of trouble for Alphabet in Europe. Many are worried that Alphabet will be subject to even tighter regulations which will cut down on the firm’s bottom line.
Then there’s the concern that this kind of regulatory smack down could spread to the U.S. There’s already been chatter about whether Google’s dominance over online search makes the firm a monopoly. Some are calling for government intervention, a move that would have massive negative ramifications for GOOGL stock.
The Verdict: Overdone
Regulations in Europe are definitely a headwind for Alphabet Inc, but that’s true for all of the FANGs and for any tech company that wants to serve the EU.
It’s a reality that Alphabet will have to work around, albeit an unpleasant one. As far as regulatory pressure in the U.S., I think that’s something that investors should keep in mind, but I agree with Lucas Hahn — that’s pretty low on my radar because its unlikely to happen anytime soon.
Advertising Growth
As I’ve mentioned before, one of the biggest problems for GOOGL stock is that the company depends heavily on advertising dollars. With both YouTube and mobile search nearing their saturation point, it’s unclear how Alphabet plans to continue growing its ad business. This concern is likely another reason that investors turned against GOOGL stock following the firm’s earnings.
Advertising revenue was up 18% and paid clicks rose a whopping 52%, however, the troubling metric was the cost per click, which declined 23% in the second quarter.
The cost-per-click revenue decrease is nothing to sneeze at, but it’s also something to expect now that more people are viewing content on their mobile rather than a laptop. Ads simply aren’t clicked as often and that means businesses aren’t willing to shell out as much on online ads.
Verdict: Founded
For me, it’s this kind of trend that makes Alphabet the worst buy out of the FANG stocks. GOOGL has lost a bit of its clout in the advertising space because competitors like Amazon.com, Inc. (NASDAQ:AMZN) are offering advertisements that are more likely to be clicked, but more importantly, translate into sales far more often.
With that said, GOOGL still managed to grow advertising revenue in spite of these trends. The company has built a massive database on its users and established itself as the leader in online search platforms.
This trend is definitely something to keep an eye on, but for now Alphabet appears to be coping with the change pretty well.
There’s a Lot to Like About GOOGL Stock
Outside of those two concerns, the only other conceivable reason GOOGL stock declined after its Q2 earnings was profit-taking. Tech stocks have been on the rise recently, and GOOGL stock was up more than 25% so far this year, so investors may have wanted to cash in.
I still believe that GOOGL is probably the worst FANG stock to pick up, but that doesn’t make it a bad buy, especially now that its share price has dipped below $1,000. Alphabet is a solid company with a proven track record of success. Like the rest of its peers it’s facing several headwinds as internet usage changes and technology expands.
The good thing about GOOGL is that the company has a plan B, and C- and probably D, E, and F as well.
Alphabet’s cloud business continued to pick up in the second quarter, a space that is expected to continue growing exponentially throughout the next decade. The firm has also been working to grow Waymo and DeepMind, its driverless car and artificial intelligence arms, two more industries that once developed, are likely to be as revolutionary as the internet was back in the 90’s.
So for now, I think GOOGL is doing exactly what it needs to- retaining its place as top-dog in search engines, collecting advertising dollars and building out new businesses that will secure its place in the future.
The Bottom Line
If you’re a long-term investor, now is a great time to add GOOGL stock to your portfolio. It’s expensive and it’s certainly not risk-free, but I believe the share price will make its way well over $1,000 over the next six months and that we could be looking at a rise above $1,500 in the next five years.
As of this writing, Laura Hoy was long AMZN.
