Selling Alphabet Inc Stock Is a Mistake — Stay Long

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Not every strong earnings report is followed by a big stock rally.

Digital search giant Alphabet Inc (NASDAQ:GOOG) reported highly anticipated first-quarter numbers after the bell on Monday (it was the first time the market would hear from a digital ad giant since the Facebook Inc (NASDAQ:FB) fiasco). The company absolutely smashed expectations. It was the biggest revenue beat in several years and an equally big earnings beat.

Clearly, the digital ad industry is doing just fine in the face of media backlash regarding consumer data privacy. And yet, Alphabet stock dropped in Tuesday morning trade.

Why? Everyone is still concerned about regulation. Until those concerns blow over, GOOG stock won’t make much progress.

The good news, though, is that those concerns will blow over, and GOOG will escape largely unscathed. When that happens, GOOG stock could explode higher. The recent quarterly numbers affirm that the business is still firing on all cylinders. Meanwhile, the stock is remarkably cheap for a hyper-growth tech giant.

Overall, GOOG stock is a buy here. Backing out near-term noise, this is a long-term winner.

Here’s a deeper look:

Strong Quarterly Numbers

The numbers were very, very good.

Revenue rose 23% year-over-year. That is just one point of deceleration from the year ago quarter (+24%). It also represents yet another 20%-plus revenue growth quarter, a sign that this company’s growth trajectory is only strengthening.

The revenue strength was across all segments. The core ad business grew 24% year-over-year. Last quarter, it was up 22% year-over-year. So, despite the Facebook data privacy backlash, GOOG’s ad revenue growth actually accelerated quarter-over-quarter.

Clearly, demand for GOOG’s global digital ad platform remains robust.

Google Other revenue was up more than 35%. That is the same as last quarter, implying that Alphabet’s ancillary businesses (cloud, hardware, Nest, and more) also remain exceptionally strong.

The only negative in the numbers was the continued compression on the operating margin line. Operating margins came in at 22% for the quarter, versus 27% a year ago and 24% last quarter. The pull-back in margins is largely a result of the ad landscape shift to mobile, which carries lower margins than desktop. This shift will persist, and margin compression will be a continued risk going forward.

But management emphasized on the call that a lot of the margin compression is a result of big investments today. Eventually, those big investments will wean off, and be replaced by robust revenue growth. Thus, margins should stabilize and head higher in a multi-year window.

Regulation Concerns Overhang

But strong GOOG earnings weren’t enough to send GOOG stock higher, and that is because there remains this ominous regulation cloud which hangs over investor sentiment.

Eventually, this cloud will pass. There isn’t much regulators can do by the way of regulating the internet’s biggest search engine. After all, the internet is built on search, and Google is search. How do you regulate what is essentially the foundation of the internet?

You can’t really. And while consumers may have some resentment towards Facebook, that resentment doesn’t exist towards Google. Thus far in the data game, Google has kept its nose largely clean (YouTube had a few hiccups, but those seem largely forgotten by now).

Overall, then, current regulation risks will blow over. At that point, Alphabet stock will roar higher.

Bottom Line on GOOG Stock

Alphabet stock is a story of near-term pain, long-term gain.

In the near-term, this stock will suffer from regulatory risks. But those risks will blow over, and thereafter, this incredibly cheap stock (25-times this year’s earnings estimates for projected earnings growth of 25% per year) will roar higher.

As of this writing, Luke Lango was long GOOG and FB. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/q1-numbers-support-long-term-bull-thesis-alphabet-inc-stock/.

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