Alphabet (GOOGL - Free Report) had a very decent quarter that investors refused to react to in any material way. True, shares did fall off in extended trading, but that was more of a sounding that the company has to do more to court investors.
It just isn’t enough that revenues were about 2% ahead of the Zacks Consensus Estimate or that earnings were more than 15% ahead. Or that the decline in cost per click on Google properties of 29% was no match for the 66% increase in the number of paid clicks. There was also little appreciation for the 7% increase in impressions on network members’ properties that was accompanied by a 5% increase in the cost per impression.
So why are prices down?
Given Alphabet’s size, it’s kind of hard to think of it as a growth company, particularly because of the considerable uncertainties in the current environment. So investors aren’t taking the company’s huge investments very well.
And if you back out the $5.70 positive impact on the EPS from the adoption of ASU 2016-01, EPS for the quarter comes to $7.07, a 27% decline from last year, reflecting the significant increase in operating expenses that shaved nearly three points off the operating margin.
Those expenses were attributed to content licensing for YouTube and headcount and other cost increases for data center and hardware. Things like data center investment show up as big costs while capacity is built out and it’s only later, as the capacity fills up, that you see the margin climb back up again.
To make matters worse, Google doesn’t say what it earns from these businesses: all we know is that its “other” revenue is up nearly 31% from a year ago. Not bad at all.
CFO Ruth Porat told Bloomberg TV that the 64% increase in capex “reflects our outlook for global growth in ads, search, YouTube and cloud." The company still managed to generate $5.91 billion in free cash flow, which is almost level with the year-ago quarter’s $5.96 billion.
This is a company with considerable growth potential folks. It’s got the deep deep pockets to go on investing for a really long time. What’s more, it’s making money hand over fist and there’s no sign of it stopping any time soon. So let the Facebooks (FB - Free Report) and Amazons (AMZN - Free Report) of the world put up some competition. Or an Apple (AAPL - Free Report) do a temporary block on it. All this will only make the ride more interesting, creating more opportunities to accumulate.
As far as valuation is concerned, the stock is off its 5-year median by 5.2% based on forward 12 months’ earnings, more than the S&P 500’s 4.9%. So any weakness in the share price is a great entry point and there will be a bounce back as reality checks in.
That’s why there’s currently a Zacks Rank #2 (Buy) rating on the stock.
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