Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported earnings last night and the knee-jerk reaction on Wall Street is to sell it. From the reaction, one would think that they missed estimates or guided down on future quarters. No, management beat on almost all metrics and they left guidance as expected.
And therein lies the opportunity. Dips in GOOGL stock are buying opportunities as they have been for over a decade. What made matters worse this time is that it rallied up 2% into the close. This on top of a 16% rally off the December lows.
So a pullback is more likely to be a period of consolidation that is always necessary to establish a stable base on which bulls can add to the rally over the next few months. It is important to note that the drop this morning is half as big as the options markets had priced in.
Investor expectations on GOOGL have always been unrealistic. This became worse when they bundled it in with the acronym FANG. From a trading perspective, Google doesn’t belong in the same group as Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN).
These are volatile tickers to the point that they are hyper-momentum stocks. They trade fast because they live fast with questionable fundamentals. GOOGL, on the other hand, is a mature company with a stable cash cow. It should be bunched with Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT). They move much slower than the likes of Netflix or Amazon.
Google’s bread-and-butter remains advertising and it continues to grow double digits. I was a little worried going into the earnings event with how much business Facebook (NASDAQ:FB) and AMZN were taking from it. From the report card that they delivered yesterday, there is plenty of business to go around.
It is important for the long term that GOOGL management continues to seek other potential cash cow venues. Much like Apple needed to do with the iPhone. In the olden days, Wall Street experts criticized GOOGL for spending too much money on outlier projects. Now it seems that they swung the other way. The news-feeds from them have become boring.
Hopefully soon this will change when WAYMO will start yielding fruit. This is a project that is almost nine years old and it needs to inch its way to center stage. Until then, GOOGL stock may remain boring. The problem there is that Waymo is level-5 self-driving technology so it may be some time before such vehicles hit the streets.
There could be help from financial engineering. Last night the CFO reiterated that GOOGL continues to invest heavily so the capex spigot is still open wide. While it is a potential problem for critics, I see it as necessary to continue the double-digit growth.
While investors are nervous about the increase in spending, GOOGL seems to be doing it in the right areas, including the cloud and AI. Furthermore, comments indicate that they will be doing this with more efficiency. Usually, bloat in human resources is worrisome but this is not the case here. So they aim to do more with less.
In terms of capital returns, Alphabet management has been underwhelming. They did again raise their buyback program by another $12.5 billion. I bet investors want to see a dividend. This would likely rocket-boost the shares higher as it would then become more marketable to a wider audience.
Google almost never trades like the must-own ticker. It’s the stock that Wall Street loves to hate and hates to love. They will buy it up but only when they are forced to do so. Regardless, the metrics suggest that Alphabet stock is still a buy for the long term.
Bottom Line on GOOGL Stock
If you own shares, this is not the time to step out of your position. For those who don’t own Alphabet stock, this report is not a reason to pile in, but you should definitely own some of it now. This leaves room to add more on days where markets are really hating on it. I am certain that most often I will not catch the most perfect place of entry but with strong fundamentals and a solid thesis, I have high conviction in my long-term investments in GOOGL.
Yes, Google has competition from FB and Amazon, but it still is the behemoth in digital advertising, especially in mobile. We are now using our phones more than ever and this too will not change anytime soon. Just like NFLX has the first mover advantage in streaming, GOOGL has that in advertising. This affords it years of dominance and time for management to add more cash cows.
Click here for a bonus video that I recently shared discussing GOOGL stock coming into the earnings. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
