Alphabet Inc missed Q4 earnings estimates. Is GOOGL stock still a good long-term buy?
Google's parent company Alphabet Inc (NASDAQ:GOOGL) missed analyst estimates in its Q4-2016 earnings report leading to a slight fall in GOOGL stock. GOOGL stock is down by a little over 4% since its earnings release. The holding company that owns Google delivered an EPS of $9.36 on revenues of $26.1B. Alphabet's fourth quarter earnings suggest that Google's double-digit growth is sustainable for several quarters to come. Alphabet Inc missed earnings estimates by a fair distance (by $0.27), but posted a strong revenue growth of 22% YoY and 16% QoQ. While Alphabet's core business continues to deliver, this quarter also saw much better results in the 'Other Bets' segment. The other bets segment posted a revenue of $262M, much higher than $152M in the fourth quarter a year ago. The earnings miss may not have gone down well with investors, but the question is, is GOOGL stock is on course to breach the $1000 mark? Should you be buying GOOGL stock after the earnings miss?
Is Alphabet's Earnings Miss A Cause For Concern?
Alphabet's Q4 earnings report included a one-time charge of $320M which reduced the company’s gross profit margin. Alphabet CFO, Ruth Porat mentioned in the earnings call that the charge was for "equipment", and also confirmed it was not for any "hardware" related to company's Pixel phone. This one-time charge remains a mystery for everyone, and had it not been for this one-time charge, Alphabet would have beaten the Street's earning estimates. Most analysts say that they have no idea about the charge and agree that excluding it Alphabet would have delivered an earnings beat. In a recent Barrons post, Brian Nowak of Morgan Stanley opined that
"By our math GOOGL’s 4Q:16 adjusted EPS would have been $10.05 excluding a $320mn charge in COGS related to equipment and a series of other adjustments and an estimated ~320bp tax headwind from one-time charges related to geographic mix and discrete US items. This implies that GOOGL would have beaten our/Consensus adj EPS by 7%/4% excluding these items. Bears may counter that we don’t know what the equipment and other charges are (they’re right) and that GOOGL very often has one-time items below the line (right again) but from a pure fundamental and recurring earnings power perspective, 4Q:16 results were materially better than expected"
He also has an "Overweight" rating on Alphabet stock. All this suggests that one should not read too much into the earnings miss. Fundamentally Alphabet's core business is on track. Though total TAC is up, rising to $4.848B from $4.055B in the fourth quarter year ago, total paid clicks growth at 36%YoY, should soothe investors' concerns.
Search Alone Is A Big Reason To Buy GOOGL Stock
One cannot think of using the internet without using search engines at some stage or the other. Alphabet's search engine Google is by far the best you can get. Google's search algorithm is not only the most sophisticated but also the best money spinning search engine. Lion's share of Alphabet's total revenue comes from search-based advertising. Alphabet's Google segment delivered an operating income of $7.9B, up from $6.7B in the year-ago quarter.
Alphabet CFO, Ruth Porat is of the view that Google's core search business has still not hit top gear and can still scale further. In the earnings call, she emphasized on this fact, stating that:
"This performance is a testament to the ongoing innovation that is driving our success in mobile search, YouTube, and programmatic advertising, each of which we believe has only begun to scratch the surface. We remain excited about the sizable opportunities that have not yet been tapped."
Also, a Barron's post suggests that Alphabet is set to gain big in its search advertising business, due to the shift in consumer spending to e-commerce platforms. This will lead to increased digital ad spending, of which Google could continue to capture outsized incremental share. Google is leaving no stone unturned to dominate the booming mobile digital ad market by announcing some new strategic partnerships in the mobile space recently.
Google Could Take A Bite Of AWS And Microsoft's Cloud Share
It is very well known that Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) continue to ride on the cloud growth wave. Google, which has a meager 5% market share in the cloud market, is slowly catching up. In the Q4-2017 earnings call, Google CEO, Sundar Pichai announced that "more than 3 million paying businesses are now using G Suite to collaborate smartly and securely in the cloud." A TechCrunch post reports that a similar announcement was last made in November 2015 highlighting the progress Google is making on the cloud front. AWS and Microsoft are marked to gain big in 2017 due to the growing cloud market worldwide. Google can still take a bite out of these two big players' share with its products gaining traction among enterprise customers. Mr. Pichai attributed "Google’s ability to provide its users with a highly secure platform " as the reason for the growing popularity of the company's cloud offerings among enterprises. Mr. Pichai also considered cloud as one of their biggest bets. So, investors should watch out for more information on this front.
Summing It Up
There is still a strong bullish sentiment around GOOGL stock among the analyst community even after its earnings miss. With Google's other bets showing substantial improvement in the last quarter's results, even one decent success from any of its moonshots could propel GOOGL stock higher in the future. Alphabet's strengthening core business prospects presents one with ample confidence to keep holding the stock. Alphabet's advertising business is set to continue its double-digit growth in 2017 as well. Investors should try to build a position in GOOGL stock, buying the stock on dips. A large number of analysts have a price target of $1000 and above which doesn't look improbable. Alphabet Inc is still very much a good long-term investment that's worth considering.
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