Alphabet Inc (GOOG) Does the Unthinkable: It Disappoints!

Alphabet Inc (GOOG, GOOGL) did something unexpected and unusual after the close on Thursday: The company reported quarterly results that fell short of earnings and revenue expectations.

Alphabet-logo-goog-googlGOOG immediately dropped 5% in after-hours trading, breaking below several important technical support lines in the process. As was explained on Wednesday, the stock was priced for perfection, and then some.

When perfection wasn’t achieved, shareholders paid the price.

What Happened to Alphabet?

Last quarter — the company’s fiscal Q1 — Alphabet earned $7.50 per share on $16.47 billion in revenue. The bottom line was better than the $6.47 per share of Google stock earned in the same quarter a year earlier, and the top line was 17% stronger than Q1-2015’s revenue. But analysts were expecting a per-share profit of $7.97, and sales of $16.54 billion.

CFO Ruth Porat said of the results:

“Our Q1 results represent a tremendous start to the year with 17% revenue growth year on year and 23% growth on a constant currency basis. We’re thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long term growth.”

The performance metrics for the company’s chief money-maker were not atypical. Its cost per click price charged to advertisers fell 9%, but the total number of paid clicks grew 29%.

Both are relative improvements on the same metrics from a quarter earlier, and not necessarily cause for alarm. The advent of mobile has lowered the click value of ads on those smaller devices, but consumers are far more active on handheld devices than they ever were on desktops and laptops.

The so-called “Other Bets” division lost $802 million during the first quarter, versus a loss of only $633 million in the same quarter a year ago.

Now What for GOOG?

While Alphabet did come up short on the results front, once again current and would-be GOOG shareholders are forced to weigh the company’s results relative to expectations, and relative to year-ago results. Plenty of companies would be thrilled with double-digit growth rates for their top and bottom lines. On the other hand…

While a quality growth company like Alphabet merits a premium valuation, the trailing P/E of 33.0 and forward-looking P/E of 19.3 still pushes the limits of what’s palatable.

And now that the bears have growled, all the would-be profit-takers who have something to defend following the 34% rally over the past year have a much greater motivation to lock in the gains they can, while they can.

Just don’t expect GOOG to stay suppressed for too long.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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