The tech sector is under fire, and no company is safe. Even Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — one of the largest and most profitable tech companies on earth — hasn’t been spared. GOOGL stock has slumped 20% year-to-date, with shares slipping from a high of over $3,000 down to an opening price less than $2,300 today.
The drop came despite fairly strong earnings. Unlike many of its peers, Alphabet didn’t hit investors with a particularly bad earnings report. Regardless, shares sliced through technical support at $2,500 and have struggled to stem the slide.
Alphabet’s decline is due to the broader market rather than anything to do with its own earnings or outlook. Yes, it’s true that Alphabet missed revenues slightly and earnings moderately in Q1. For people that just read the headline numbers, Alphabet came up short of expectations.
It’s important to break things out by category. Google’s search, digital services, and cloud all grew in-line or ahead of expectations. Cloud in particular is performing well for Google, despite some fears that it would slow down this quarter.
The big issue was a dramatic slowdown in YouTube revenue growth. This played into the broader concerns that the digital advertising market is losing steam. Historically, advertising is a cyclical market driven by the broader economy, and analysts are nervous that Google will see a slowdown as the economy cools off after a boom in 2021. Beyond advertising, however, Alphabet is performing well operationally.
Even within advertising, another factor under the surface is that YouTube is heavily pushing its shorts feature. This are brief videos directly designed to compete with TikTok. Right now, these are very lightly monetized as opposed to full-length YouTube videos. However, engagement with these shorts is up dramatically, and it should drive revenues over time as YouTube figures out how to handle ad-load for that product.
Core metrics such as prices on advertising and profit margins on the ad business increased, indicating that Alphabet’s operations are faring better than many of their digital rivals.
The big issue with Alphabet stock now is simply that no one wants to invest in tech at the moment. In fact, the former winners, such as the FAANG stocks, are now being sold as folks raise capital. Big funds, in particular, need liquidity to meet redemptions or shore up their positions in smaller and less liquid companies. Holdings such as GOOGL stock are being used as sources of much-needed cash.
In a market sell-off, people sell what they can where there is still liquidity and relative value, instead of selling their most beaten-up holdings. Given these market dynamics, GOOGL stock may remain under pressure throughout much of 2022.
That being the case, for investors with a longer time horizon, say the next 3-5 years, there’s a good chance that buying Alphabet today will lead to a profitable outcome.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
