When you look at the big picture, Alphabet Inc (NASDAQ:GOOGL) has had a good year. The company grew both sales and earnings by more than 20% across calendar 2016, and GOOGL stock has risen accordingly — more than 15% in the past 12 months, and 11% year-to-date.
In fact, with Monday’s push, shares are again trading at all-time highs.
But there have been a few potholes along the way, and earnings misses were responsible for two of them — a pertinent fact as we head into Alphabet’s Q1 earnings report, out Thursday after the bell.
Earnings Misses Have Slowed Alphabet Before
Alphabet has fallen shy of analyst earnings estimates in two of the past four quarters, including a 3% shortfall in Q4 2016. That miss prompted Google’s parent to plummet from $857 to $815 in just four trading sessions across late January and early February.
Last April, when the company missed first-quarter estimates by nearly 6%, GOOGL stock also fell hard, dropping nearly 10% in a week.
On both occasions, shares took a few weeks to recover from their earnings-induced losses. Those pullbacks, along with a couple other big declines around the Brexit and the presidential election, were enough to prevent GOOGL from keeping pace with other Nasdaq stocks. In fact, while Alphabet’s 15% tally over the past 12 months sounds nice, it actually trails a 20% return in the broader composite.
All of that is to say: Alphabet’s earnings report this Thursday does matter, it’s just not make-or-break.
A miss could stunt shares’ progress again and knock them off their perch at all-time highs. An earnings beat could send GOOGL stock even higher — likely to at least $900 before the calendar flips to May. Last July, for example, the stock jumped above $800 for the first time ever after the company beat earnings estimates by 4.7%.
Alphabet is a rare bird. It’s one of the largest companies in the world, and yet it still manages to routinely grow its top and bottom lines by double digits, putting it in a class with a select few, including Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN).
Sometimes, GOOGL is a victim of its own success, similar to Apple (NASDAQ:AAPL) a few years ago. Alphabet has set the growth bar so high that analysts expect a lot from the company every quarter. When earnings (or sales) fall short of those expectations, investors punish the stock.
But that’s also why Alphabet is one of the most desirable stocks on the market.
Those quick selloffs tend not to do any lasting damage. GOOGL stock has been on an upward trajectory for about five years, suffering no real comeuppance. Alphabet’s difficulties might have slowed the stock down, but again … here we are, discussing the stock as it sits at all-time highs.
A Low Bar Should Help GOOGL Stock
Estimates for this past quarter are more muted than usual. Analysts anticipate 19.5% sales growth with a small earnings decline, which would be the first since the third quarter of 2014. So the earnings bar is lower than usual for Alphabet this time around.
A miss, combined with a rare profit decline, could spark a serious selloff — particularly with GOOGL stock at its lofty perch.
My advice? If you already own — which I’m sure many of you do — simply hold on and weather whatever storm comes your way if the company misses earnings again on Thursday. Things will likely turn ugly, but if history is any indication, shares will recover their losses within a month.
It’s a bit more tricky if you’re considering jumping in, but I suggest you wait for earnings and hope for a post-earnings dip in GOOGL stock before purchasing. Wall Street’s typical overreaction to a miss could result in a prime buying opportunity in one of the market’s great long-term growth stocks.
Either way, Thursday’s report looms large for Alphabet.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
