Anyone looking to buy Alphabet (NASDAQ:GOOGL) stock just got a second chance. GOOGL stock had been powering higher throughout the month of April, gaining more than $100/share heading into earnings. Just prior to earnings, in fact, GOOGL stock overtook the highs from last July to set a new all-time record of nearly $1,300 per share.
Sentiment changed in a hurry following Monday’s earnings disappointment. As of this writing, GOOGL stock is down almost $120 per share — or 9% — following the earnings report. Rather remarkably, on a percentage basis, this was Alphabet stock’s biggest gap down on earnings since its IPO back in 2004. Some traders truly are spooked.
It’s worth taking a broader perspective before you panic, however. For one thing, even trading down $100/share, GOOGL stock is only back to where it was toward the beginning of April. For another thing, the company’s earnings trajectory remains outstanding, even if this quarter was a little light.
Alphabet Makes A Rare Revenue Miss
Alphabet beat earnings on a non-GAAP basis, though it came up a few percent short of expectations for GAAP earnings. What really rattled the market, causing the big drop in GOOGL stock, however, was revenues.
For the quarter, analysts had expected $37.7 billion in revenues, representing a 20% year-over-year growth rate. Instead, investors got a more subdued $36.3 billion in revenues. As a result, the year-over-year revenue growth rate came in closer to 17% instead of the expected 20%.
To be fair to the GOOGL stock bears, this is in fact a pretty big miss against expectations. Additionally, Alphabet’s earnings are usually quite predictable. This is the first time in two years that the company failed to match expectations.
This has analysts wondering just what happened. Brent Thill of Jeffries, for example, said that the quarter raised “more questions than answers” and that Alphabet’s lack of transparency was concerning. RBC’s analyst Mark Mahaney put it more bluntly, giving his latest note the headline “Hey Google, What Happened To Revenue Growth?”
What Caused The Miss?
Alphabet did, in fact, blame a variety of factors for the revenue slowdown. Among these, changes in its ads product mix, difficult comps, and perhaps most importantly, a nasty hit from foreign exchange.
However, it’s unclear what portion of the revenue slowdown was attributable to each cause. This left numerous analysts complaining about the company’s opacity in operating results. The question on everyone’s mind is whether this is a one-off slow quarter or the start of a new trend. Foreign exchange factors certainly come and go.
But ad product changes could have lingering effects. And there’s the looming question of how much competition from Amazon (NASDAQ:AMZN) and other players is hitting the ads market. This leaves folks like J.P. Morgan’s analyst saying that: “As noted above, the exact drivers of GOOGL’s slowing top line are unclear, & we believe frustration around GOOGL’s lack of transparency will only increase.”
GOOGL Stock: Reasonably Priced
One interesting thing is that the investment banks — in general — only modestly trimmed their price targets. J.P. Morgan, cited above, for example, cut their price target from $1,310 to $1,250 — less than 5%. Nomura Instinet cut just $10 off their price target, down to $1,300. Goldman Sachs lowered their outlook from $1,400 to $1,350 while maintaining a buy rating. For all the griping about revenue growth, the analysts don’t seem particularly worried. That’s a far cry from the market’s panicky reaction so far.
It’s not hard to see why analysts are largely keeping their price targets in tact. For one thing, GOOGL stock has now gone sideways for over a year. It first hit the $1,200 mark in the beginning of January 2018. That marks 15 months of consolidation for the stock, while the company’s revenues and earnings have continued to grow at a strong pace.
One modestly softer quarter — while still posting strong overall growth — hardly derails the whole bull thesis. The company trades at under 24x forward earnings with earnings still likely to grow at least 15%/year, even if this revenue growth slowdown persists for a bit. Plus the company has an outstanding balance sheet and could put its cash to work with buybacks or even start a dividend. Shareholders have multiple ways to win here.
GOOGL Stock Verdict
If you bought GOOGL stock on April 9th of this year, you would have paid around $1,200/share. If you then ignored the market for the next three weeks and just tuned back in today, you’d think that nothing much had happened. While some folks on social media are really worried about the price action in Alphabet stock, it’s not a big deal. GOOGL stock was way back at $1,000/share during the fall correction, after all.
Will it take Alphabet a little while to get back to fresh all-time highs? Probably. Is the company’s ability to keep growing both revenues and profits altered? Not at all. For longer-term investors, this dip is a second chance to buy GOOGL stock if you missed it earlier this year.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
