Alphabet Inc (GOOGL - Free Report) AKA Google, the search engine that runs the internet for 90% of humans, has lost 19% of its market value since its earnings release at the end of April, putting GOOGL on the edge of bear market territory. $179 billion of value has been wiped out of the market, pushing Google one step further away from the coveted trillion dollar market cap.
Q1 Earnings Recap
Google’s Q1 results were released at the end of April, beating EPS estimates by 12.5% but missing on revenue. GOOGL fell over 6% following this release and has continued to fall since. Investors are concerned with the deceleration of top-line growth, specifically ad revenue.
Year-over-year (YoY) revenue growth for Q1 was 16.7%, the first time this figure has been below 20% in 3 years. Ad revenue dropped to 15.3%, lower than it has been in over two years.
Alphabet’s paid clicks grew only 39% YoY for Q1, down from the 50 to 60 percent growth range it attained in the prior year. CFO Ruth Porat commented on the matter, explaining that the “vast majority of total clicks” are from YouTube and the growth slowdown is due primarily to this subsidiary.
YouTube is still not represented in Alphabet’s financial statements as a separate entity, making it difficult to quantify its deceleration. Alphabet is quite taciturn when it comes to specific segment data. They only quantify segments as broad groups.
“Google Cloud Platform remains one of the fastest growing businesses in Alphabet, with strong customer momentum, reflected in particular in demand for our compute and data analytics products,” says Alphabet’s CFO Porat. Their cloud segment along with Play and Hardware are all within “Google other revenues”, which saw 25% YoY growth.
Cloud technology is an exceedingly competitive space and Google is contending in this space with best in class companies like Amazon (AMZN - Free Report) , Microsoft (MSFT - Free Report) , and IBM (IBM - Free Report) . Google is behind in market share and will need to continue to invest significant amounts to remain a key player in the space.
Google has historically done the worst in Q1 because of how revenues are recognized and I do not believe that this deceleration in revenues is signal of a broader systemic issue within the company…yet. This was also following 26% YoY top-line expansion in Q1 2018, the most robust growth figures since 2013. The fact that Alphabet doesn’t disclose individual segment data makes understanding key drivers a little more ambiguous. Q2 will be much more telling in whether this top-line slowdown is a fundamental issue moving forward.
Analysts are estimating that revenues will grow 17.8% YoY in Q2, which would marginally reverse the top-line deceleration trend. Q2 EPS estimates are expected to exhibit 2.3% negative growth from the same quarter last year, this would represent the first YoY EPS decline in 2 years. With double-digit EPS beats the last 4 consecutive quarters, I am confident they can do it again.
GOOGL tumbled 14.6% from its Q1 earnings release at the end of April to the end of May. Since Monday the stock has slid another 4.6% on news that the DOJ is launching a new antitrust inquiry into Google. Many of its competitors have been complaining to regulatory authorities about Google’s monopoly on internet searches. Claiming that they operate at the expense of their competitors, making it almost impossible to compete in the search engine space.
To prove that Alphabet is violating the antitrust laws they must prove that consumers would be better off if Google were to break up. Google appears always to be working for consumers to ensure that antitrust laws are not permeated. Google has already survived the FTC’s antitrust investigation back in 2013, and I am confident that this investigation will not upend this tech powerhouse that has been making life easier for humans around the world since its launch.
I think that the soft revenue results in Q1 along with news of the DOJ’s investigation might have created a buying opportunity for investors. This growth stock is now trading at multiples that even savvy value investors would be comfortable with.
GOOGL is valued at a forward P/E of 20.38x, which is the lowest this stock has traded at since the beginning of 2015 as well as far below the computer software & service industry average.
When you add growth to the multiple using the PEG valuation, the figures look just as promising with GOOGL trading at 1.17x close to the firm’s 5-year low and below the industries 1.37x.
Alphabet looks to be a bargain at its current multiples. If you believe that the most recent top-line deceleration isn’t a systemic issue and that the antitrust laws will not break up the firm, then this is an excellent buying opportunity. Q2 results that are expected to be released on the 22nd of next month (July 22nd), will reveal much more about the health of Google’s operations and expansion rate. Look for growth patterns in ad revenue and paid clicks to understand if or how quickly this firm’s top-line is decelerating. Google’s cloud platform and its ability to gain market share is also something to keep an eye on.
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