Alphabet Stock Craters On Revenue Miss

Alphabet Stock - Misses Revenue Estimates

Big tech firms had all reported solid earnings up until Alphabet reported on Monday. Netflix, Microsoft, Amazon, and Facebook have all been flying high. Alphabet ruined the streak as the company reported revenues of $36.34 billion which missed estimates for $37.33 billion. This miss sent its stock down 7.31% after hours on Monday evening. 

As you can see from the chart below, Alphabet’s revenue growth of 16.7% was the lowest since Q3 2015. To be clear, most big tech firms have seen their revenue growth fall. However, their stocks didn’t react as negatively to their results as Alphabet’s did.

The firm’s revenue growth was down from 28% last year. This shows Alphabet is being hurt by the economic slowdown.  Big internet names can be flummoxed by a weak economy. They are too big to hide behind secular growth trends and market share gains. Good news is the economy might accelerate later in the year, meaning this weakness could be over soon.

Ex-items Alphabet had $11.90 in EPS which beat estimates for $10.61. Traffic acquisition costs were $6.86 billion which was below estimates for $7.26 billion. Part of this cost is payments to Apple to be the default search engine on its browser. It’s good to see this miss estimates. 

Alphabet Stock - Paid clicks on Google properties were up 39%. 

That’s a huge drop from Q4’s growth rate of 66% and Q3’s growth rate of 62%. Google properties aren’t growing traffic quickly enough to make up for the decline in advertising prices. The cost per click on Google properties was down 19%.

YouTube caused the decline in click growth. Ruth Porat, Alphabet’s CFO stated, “While YouTube clicks continue[d] to grow at a substantial pace in the first quarter, the rate of YouTube click growth decelerated versus what was a strong Q1 last year reflecting changes we made in early 2018, which we believe are overall additive to the user and advertiser experience.”

As you can see from the chart below, Google’s ad revenue growth fell from 19.86% last quarter to 15.31% this quarter. The one positive spin you can put on this is the comp was tough as Q1 2018 had 24.43% growth which was the highest rate in the 2 year span this chart includes.

Even though Alphabet wasn’t the most high flying big tech stock, its 24% rally year to date isn’t consistent with only 16.7% revenue growth. The stock clearly got more expensive over this time frame. During the quarter, Alphabet was fined $1.7 billion by the European Commission for stifling competition in the online ad industry. 

Excluding the fine, operating income increased 26% to $8.31 billion. 

Alphabet Stock - Still a profit machine; its stock just needs to adjust to these disappointing results. 

Total cash and marketable securities increased 4% to $113.5 billion. Alphabet will probably do a massive buyback like Apple sometime in the next few years. Weakness in the stock could catalyze such a buyback. It would be a long term win for shareholders. It would unlock the benefit of having all that cash.

As the cost per click declines, the firm is trying to build success in its hardware and cloud businesses which are included in its ‘other revenues’ segment. This category saw revenues increased 25% to $5.45 billion. Hiring in the cloud division drove Alphabet’s operating expenses higher. The firm is trying to compete with Microsoft and AWS. 

Amazon has the lead, but Microsoft is gaining on it. Google’s cloud business is expected to accelerate, but capex growth won’t grow as fast as last year which is good news for profitability.

Finally, Alphabet’s ‘other bets’ segment saw revenues increased from $150 million to $170 million. Many of these businesses are pre-revenue, so revenue growth isn’t the best way to measure them.

 Two of the most prominent parts of this category are Waymo, the self-driving car company, and Verily, which is a healthcare venture. Self-driving technology is still years away from being implemented. Alphabet owns 5% of Uber and Lyft. Lyft stock has struggled since its IPO. 

Uber’s IPO will make Alphabet a significant amount of money. Uber could be worth $100 billion when it does its IPO in May.

Alphabet Stock - Consumer Sentiment Improves

Fresh off a weak Q1 for the consumer, which I will discuss in my article on the GDP report tomorrow, the University of Michigan consumer sentiment index improved from 96.9 in mid-April to 97.2 at the end of the month. This beat estimates for 97.1. 

For a few months, bearish investors have falsely been claiming the high difference between the expectations index and the current conditions index meant the economy was headed for a recession. This claim doesn’t make any sense because both expectations and current conditions have been doing well. It’s not as if expectations have been cratering, while current conditions were strong.

The difference between expectations and current conditions fell in the 2nd half of April, which further hurts the bears’ case. Expectations fell noticeably in the first half of April, but increased in the 2nd half so that the index only fell 1.4 points from March. It ended April at 87.4. 

Current conditions rose in the first half of the month, but then fell sizably in the 2nd half, ending the month down 1 point to 112.3. Overall, the index fell 1.2 points from March. Inflation expectations for the next year stayed at 2.5%, but expectations for the next 5 years fell 0.2% to 2.3%.

Alphabet Stock - Conclusion

Alphabet reported a weak quarter even though its EPS beat estimates. It is succumbing to the cyclical weakness that the other big tech companies are being impacted by.  A problem for Alphabet stock is investors’ expectations weren’t properly calibrated. It is poised to have the biggest post-earnings drop out of the big internet firms. 

Apple’s earnings report will be released on Tuesday. It’s the last of the big internet firms to report results. It will go a long way in determining the Nasdaq and the Dow’s weekly performance. 3 Attachments

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