Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported earnings last week and the results were disappointing. The disappointment for GOOG stock owners was that revenue came in at $33.7 billion, while the consensus estimate was for revenue of $34.4 billion.
Shares of Alphabet stock slumped as much 7% during after-hours trading Thursday night, but the stock didn’t slump near that much during Friday’s trading session. The loss ended up being a much more tolerable 1.79%.
What I found interesting was how GOOG stock held up when so many other stocks have dropped sharply when earnings or revenue have missed their targets recently.
Looking at the weekly chart, we see that Alphabet stock has been moving higher within the confines of a trend channel since the middle of 2015. The low last week did take the stock below the lower rail of the channel, but it rallied to close right on that rail.
Another thing that caught my eye was how the weekly stochastic readings have reached oversold territory during the recent pullback. The stochastics have only hit oversold territory four times in the past three and a half years. Each time time they did, GOOG has experienced a nice rally. In each of the last three instances, GOOG stock has rallied at least 25% within a three-to-six-month window.
The 10-week RSI isn’t in oversold territory, but it is hitting its lowest reading since the summer of 2016: GOOG stock was under $700 a share at that time.
All of these factors — the support of the lower rail, the oversold levels on the stochastic readings and the low reading on the 10-week RSI — are pointing to a bounce for Alphabet stock.
If you base your investment decisions on fundamentals more than the technical picture, GOOG doesn’t disappoint there either. The company has averaged earnings growth of 25% per year over the last three years. Even the recent “disappointing” earnings report showed Alphabet earnings growth of 24% over the previous year.
Sales have grown at a slightly slower pace than earnings, but the rate is still much greater than most companies. Over the last three years, sales have grown at an average annual rate of 22%. Last week’s quarterly report showed sales growth of 21% on a year-over-year basis.
Alphabet’s profitability measurements are also well above average with a return on equity of 17.3%, a profit margin of 27% and an operating margin of 24.5%.
Bottom Line on GOOG Stock
If there is a knock on Alphabet stock, it is the fact that the sentiment is extremely bullish. The short interest ratio is only at 1 and it has only been above 2 on a few occasions over the past year. There are 43 analysts following stock in Alphabet and 38 of them rate it as a “buy”, while the other five rate the stock as a “hold”.
Both of these readings reflect extreme optimism, but in this case, the optimism is warranted. The fundamentals are strong and GOOG has been trending higher.
There are instances where a stock price outpaces the actual company, meaning the stock is shooting up at a faster pace than the actual company’s fundamental performance. But that isn’t the case for Alphabet stock. The fundamentals actually seem to be outpacing the GOOG stock price at this time and that could be another factor that brings about a bounce.
Based on the trend channel and the bounces after oversold levels on the stochastic readings, I look for GOOG to bounce up to the $1,300 level within the next six months.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.