Alphabet’s Post-Earnings Drop Appears To Be An Overreaction

Michael Kramer and the clients of Mott Capital own GOOGL.

Alphabet Inc.’s (GOOG, GOOGL) stock is dropping following its fourth quarter results. On the surface, the quarter may look disappointing to some, given a revenue miss. However, the revenue miss almost appears to be a rounding error at the same time. Overall trends for the company remain strong and show very little, if any slowdown for a business that managed to report just over $46 billion in revenue, in only one quarter.

The post-earnings drop appears to be more of an overreaction to expectations that may have gotten ahead of themselves. Overall, operating income for the company remains robust, while the earnings per share came in much better than expected. But perhaps, more important is that for the first time, the company has given investors more visibility into its other businesses, YouTube, and Google Cloud.

Disappointing Revenue Growth

The stock’s decline seems to be due to a slower revenue growth rate in the fourth quarter, and for the lack of a big beat. Investors have become very focused on Alphabet’s growth rate in previous quarters and its ability to grow revenue at more than 20%. However, the fourth quarter results show that revenue grew at a slower pace.

But there was nothing not to like from the results, with robust year-over-year revenue growth and solid operating growth. To some degree, expectations may have gotten too high heading into results, with the stock up over 10% to start the year. The shares had run up 3.5% on February 3 alone heading into the results after the close.

A Minor Miss?

Overall revenue grew by 17.3% to roughly $46.1 billion versus analysts’ estimates for approximately $46.9 billion. Additionally, the company reported earnings growth of about 20% to $15.35 per share, which was better than analysts’ estimates of $12.62 per share.

The strong earnings appear to have come on improving operating income, which climbed by 12.7%, to about $9.3 billion. Also, the strong earnings beat seems to have been helped by non-operating income as well, at $1.4 billion on gains in their equity portfolio and interest income.

More Clarity

The company also broke out its Cloud business for the first time, reporting revenue of $2.6 billion, which was up by almost 53%, versus last year. Also, Alphabet reported revenue for YouTube for the first time, which showed growth of about 31% to $4.7 billion during the quarter versus the same period a year ago.

Strong Growth Going Forward

Analysts currently estimate revenue will grow by 17.4% in 2020 to around $190.9 billion, and by an additional 16.3% to $221.95 billion in the year 2020. The slightly weaker revenue results for the fourth quarter may negatively impact those revenue estimates. However, better earnings results could help to lift analysts’ earnings estimates for future years. Currently, analysts see earnings growth in 2020, rising by around 10.6% to $53.88 per share, and by 13.7% in 2021 to $61.25 per share.

Overall, these aren’t results that are going to send Alphabet’s shares surging higher given the big run-up into results, but at the same time, they aren’t results that should send shares sharply lower. They are results that should be good enough for the moment to keep investors optimistic about the current growth trends currently in place.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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