Google’s parent company Alphabet (NASDAQ:GOOG) saw its share price dip after the company’s Q4 earnings report. The stock fell 6% in extended trading after the announcement.
On the face of it, though, the update wasn’t that bad – revenues, operating profits and earnings per share all showed double-digit growth compared to a year ago. So why is the stock going down?
Earnings
At first sight, the report looked extremely strong. Revenues (+13%), operating income (+30%) and earnings per share (+56%) came in above analyst expectations.
Google Cloud was a real highlight, achieving 26% revenue growth. The only disappointement was advertising revenue, where Alphabet reported $65.52bn compared to expectations of $65.94bn.
This still represents an 11% increase compared to the previous year. But with advertising making up over three quarters of Alphabet’s overall sales, the disappointment is reflected in the share price.
So should investors be concerned about weaker growth in the company’s core operations? Or is there a buying opportunity here, with the stock coming down?
Wait for it…
I think a lot depends on why Alphabet’s advertising revenues came in below expectations. I’m not concerned if it’s part of a cyclical trend, but I’d be alarmed if it’s to do with the company specifically.
It’s difficult to tell just from Alphabet’s earnings. But I’ll be watching closely when Meta Platforms and Amazon – the other big digital advertising firms – report their earnings in the next few days.
If Meta and Amazon have been outperforming Alphabet, then I’ll see Google’s growth as a cause for concern. But if their performance is similar, that’s indicative of a wider trend, in my view.
So I think investors ought to look for a bit more context before taking a view on Alphabet’s results. From my perspective, there’s a lot that’s still to be revealed over the next few days.
Beyond advertising
It’s difficult to overstate how important advertising revenues are to Alphabet’s business. I think it’s a fair criticism of the company that – for all its success in this arena – it hasn’t done much else.
So far, that that hasn’t mattered much. But it’s important for investors to see where the next growth engine is going to come from and it looks like it might be cloud computing.
Unlike advertising, cloud revenues came in above expectations. But again, I think it’s important to get some context on the result before working out what it shows about Alphabet.
As a result, I’ll also be watching to see how Google Cloud’s results compare to its counterparts at Amazon and Microsoft. That will provide important context for Alphabet’s new growth avenue.
Buying the dip
The stock market has been more decisive, sending the stock down 6%. If I’m right, this could be premature and this could be the kind of cyclical dip that all businesses face from time to time.
Despite this, I’m hesitant about buying Alphabet shares. The initial reaction only puts the stock roughly back where it was at the start of the year, and at 25 times earnings, it’s not an obvious bargain.
Alphabet is a quality business and its dominant position plus its growth means the stock deserves a premium valuation. But I’m waiting for more information before making a decision about buying.
