There’s so Much to like About GOOG Stock Ahead of Earnings

Strong Q3 numbers could end the recent sell-off in GOOG stock

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As the stock market has tumbled over the past few weeks, internet giant Alphabet (NASDAQ:GOOG) has tumbled with it. As of this writing, GOOG stock is roughly 15% off recent highs, marking its biggest sell-off since early 2015.

The recent sell-off has plunged Google stock into value territory. This is a company that grew revenues by over 20% last quarter (and which has grown revenues by over 20% for several consecutive quarters). Yet, Google trades at just 25X forward earnings, which is cheap for a perennial 20%-grower.

But, if anything is clear lately, it is that this stock market is spooked. Between rising interest rates, tariffs, slowing economic growth, peak margins, regulation and debt, investors aren’t willing to push stocks higher just because they are cheap. Instead, stocks need to prove that they deserve to go higher.

This earnings season is a chance for stocks to prove that they deserve to bounce back. Some stocks have been doing that. See McDonald’s (NYSE:MCD). Other stocks haven’t been doing that. See Caterpillar (NYSE:CAT).

Which pile will GOOG stock wind up in? The former. I think Google will follow in the footsteps of MCD stock, and report strong numbers which force investors to reassess the recent sell-off. As such, I think Google is a buy into the print, and a hold for the long-term as this company’s long-term growth narrative continues to gain momentum.

Alphabet’s Quarter Should Be Good

The long-term bull thesis on GOOG is one predicated on the idea that Alphabet owns some of the internet’s most valuable and necessary platforms. As internet usage continues to grow globally, the value and importance of those platforms will grow, too.

Meanwhile, the company has other nascent but rapidly growing businesses in secular growth markets like cloud, IoT, and self-driving, the sum of which should sustain big growth long after the digital ad growth narrative dries up.

Not much about this bull thesis has changed over the past several weeks as the stock has dropped 15%.

The two big concerns are that Amazon (NASDAQ:AMZN) is stealing Google search ad dollars, and that Google Cloud is losing share to Amazon and Microsoft (NASDAQ:MSFT).

These are legitimate concerns. Amazon’s digital ad business is ramping, and CNBC recently reported that some brands are moving a huge portion of their Google ad budget to Amazon. Meanwhile, Google just dropped out of the $10 billion JEDI race, and that isn’t a promising sign for Google Cloud.

But, these concerns seem both overstated and premature. Amazon’s ad business will likely measure around $8 billion this year. Google’s ad revenues were nearly $100 billion last year. Thus, Amazon encroachment is still a relatively small threat.

Plus, the whole digital ad market is still growing at a near 20% rate. Thus, it can sustain big growth from multiple players going forward, much like it has sustained big growth from both Facebook (NASDAQ:FB) and Alphabet over the past several years.

On the cloud front, dropping out of JEDI isn’t a great sign. But, there are other reports out there which imply that Google Cloud still is gaining share and winning contracts. Thus, it appears that Google Cloud continues to grow alongside the hyper-growth cloud market.

Meanwhile, Google search remains the backbone of the internet and arguably the most frequently used platform across the whole internet. YouTube is steadily gaining share in the hyper-growth internet entertainment segment, from 21% mind-share in 2015 to 33% mind-share today.

Google Chrome has maintained dominant market share. So has Gmail, which has been infused with new AI technology recently. The smart home business is rapidly gaining share. And, Waymo just hit 10 million self-driving miles and remains the leader in the potentially huge autonomous driving market.

Overall, things at Alphabet are still great. That will be obvious in the third quarter print, and as such, Q3 earnings could be a strong bounce-back catalyst for Google stock.

Google Stock Could Bounce

Because secular tailwinds remain strong, this should be yet another 20%-plus revenue growth quarter for Google. Normally, such quarters have mildly positive reactions in Google stock. But, this time could be different. This time, GOOG stock could pop in a big way.

Why? Because the stock is beaten up heading into the print. It has dropped 15% over the past several weeks, and the valuation has compressed to historically normal levels despite above-average growth prospects going forward due to YouTube, cloud, self-driving, and smart home.

Overall, then, you have a beaten up stock heading into what promises to be at least a decent, if not a pretty good, earnings report. It is tough to see GOOG stock dropping further on decent numbers. Meanwhile, it is easy to see the stock rallying some on decent numbers, and rallying big on strong numbers.

Thus, the risk-reward on Google ahead of earnings looks favorable.

Bottom Line on GOOG Stock

Google stock is a long-term winner that is going through some near-term turbulence. That near-term turbulence could take a breather, if not entirely end, in the event that third quarter numbers are good. Third quarter numbers should be good, so the recent sell-off in GOOG stock could reverse course within the next few days and weeks.

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

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