The Alphabet (NASDAQ:GOOG) share price is falling in extended trading. That’s despite revenue and profits coming in ahead of expectations in the company’s third quarter earnings report last night (24 October).
Despite the decline, shares in Google’s parent company are still up 46% since the start of the year, compared to a gain of 11% for the S&P 500. So is there a buying opportunity here for investors?
Head in the clouds
In general, Alphabet’s update looked reasonably strong. Revenues came in 11% higher than a year ago and earnings per share were up by 46% as a result of cost-cutting measures across the firm.
The market was unimpressed by the company’s cloud computing business though. The division managed $8.4bn in revenue (22% higher than a year ago) but this fell short of analysts’ expectations.
CFO Ruth Porat put the underperformance down to clients cutting back on spending. But at the same time, Microsoft is posting strong results in its Azure division, so investors weren’t convinced.
As a result, the Alphabet share price fell by 6% in afterhours trading. But with Google Cloud currently accounting for less than 11% of the company’s overall revenues, is the market overreacting?
Why it matters
Despite its relative size, I don’t think investors focusing on Alphabet’s cloud computing division is unjustified. As I see it, Google Cloud is an important part of the investment thesis going forward.
For some time, the biggest risk with Alphabet stock has been its reliance on Google advertising. This makes up around 78% of the company’s revenues and virtually all of its operating income.
Until recently, this hasn’t been a problem due to Google’s dominant market position. But the emergence of ChatGPT has presented the first meaningful challenge to this for some time.
Investors had been looking to Alphabet’s cloud division as something that might reduce the company’s dependence on its digital advertising business. So disappointing results here are significant.
Buy, sell, or hold?
Right now, Alphabet doesn’t feature on the list of stocks I’m looking to buy, even after the drop in the share price. But if I owned it in my portfolio (which I currently don’t) I wouldn’t sell it.
Before last night, Google shares traded at a price-to-earnings (P/E) ratio of around 30. That’s significantly higher than the average for the S&P 500, which is around 22.
Following the growth in the company’s earnings and the decline in its share price, the multiple comes down to around 25. That’s a lot more reasonable, but it doesn’t jump out at me as a bargain.
Equally though, Alphabet has a strong business and growth across the firm as a whole looks strong to me. So I wouldn’t be in a hurry to sell the stock, especially at a 6% discount to yesterday’s prices.
