I used to own shares in Google’s parent company Alphabet (NASDAQ:GOOGL), but I sold them in 2020 when I became worried about antitrust issues. I now regret that decision and I’ve been looking for the Google share price to give me an opportunity to invest again ever since.
Alphabet’s stock is lower in pre-market trading this morning after the company reported its earnings last night. I’d almost given up on seeing this stock at an attractive valuation, but I think this could be my chance.
Earnings
Alphabet’s earnings report looked pretty strong at first glance. The organisation reports its earnings under three main segments: Google Services (which includes the search engine and YouTube), Google Cloud, and Other Bets.
Of these, it’s the Google Services segment that currently drives the company’s income. And the results were strong overall here. Operating income increased from $19.55bn to $22.92bn—representing growth of just over 17%.
Revenues across the whole company came in reasonably strongly. Across all of its operations, Alphabet reported $63bn in revenue in the first quarter. That’s a 23% increase on the same quarter of last year.
So why is the stock falling? There are two major reasons.
First, Alphabet’s revenues and earnings per share (EPS) both came in below analyst estimates. Where analysts were looking for $68.11bn in revenues, Alphabet only brought in $68bn. And the $24.62 in EPS fell short of the expected $25.91.
Second, while Alphabet’s revenues increased, the rate at which those revenues are growing declined. The company’s 23% increase in revenues marks a substantial slowdown compared to the 30% growth it reported last year.
The big disappointment came from YouTube. Advertising revenue came in significantly short of expectations ($6.87bn vs $7.81bn) and its rival TikTok also seems to be growing significantly faster in terms of the number of viewers.
Taken together, these factors were enough to send the stock lower this morning as investors waited for the US markets to open. But the business is still growing and I believe there’s room for optimism.
An overreaction?
When companies that are growing at fast rates begin to slow down, this can cause a sharp drop in share prices. In the case of Alphabet, I don’t think that this is warranted.
For a business the size of this one, 20% revenue growth is impressive in my view. Moreover, Google — which is the largest contributor to the company’s earnings — remains the dominant force in an important sector.
The antitrust risks that I referred to before are still there, but I’m convinced that I previously overestimated their significance. And this risk is, in my view, offset somewhat by the fact that the company’s shares trade at just 21 times earnings.
I think that this is the opportunity to buy Google stock that I’ve been waiting for. If the Alphabet share price falls below $2,150 per share, I’m going to be looking at making a serious investment.
