Alphabet shares fell after what looked like a strong earnings report, which could create a buying opportunity.
There was nothing wrong with Alphabet's (GOOGL.O) earnings numbers. The company reported earnings of $1.89 per share and revenue of $84.7 billion, beating market expectations of $1.85 and $84.2 billion, respectively. But that wasn't enough, as the company's stock fell 5% on Wednesday, its biggest drop since late February, and is now down more than 9% from its July 10 high.
Expectations may be high given the stock's 30% year-to-date gain, but there are other concerns. First and foremost is Alphabet's spending on artificial intelligence, especially after capital spending jumped 91% in the second quarter and is likely to continue growing rapidly.
However, the drop seems too extreme. Evercore ISI analyst Mark Mahaney pointed out that first of all, Alphabet's bet on artificial intelligence seems to have paid off. He pointed out that Google's AI news digest is attracting users rather than driving them away, which has also led more young people aged 18-24 to use Google's artificial intelligence product Gemini; more than 1.5 million developers are using Google's artificial intelligence product Gemini; advertisers have seen significant improvements in the company's SmartBidding tools. Mahaney explained: "We believe that Google is an undervalued product cycle company, and the disclosure of this information is important." He set a target price of $225 for Google's stock price, up 30% from Wednesday's closing price of $172.63.
This cycle and the growth that comes with it has helped Alphabet’s operating margins rise to 32% from 29% in the second quarter of last year, suggesting that AI is likely to pay off. We say “likely” because Alphabet disappointed some investors when it highlighted the potential pressure on margins in the third quarter, though some of that was due to moving the “Made by Google” event, which is expected to unveil the Pixel 9 phone, from the usual fourth quarter to the third quarter.
Beyond that, most of Alphabet's other businesses did well. The core advertising business grew double-digits, helped by artificial intelligence. Cloud computing sales, which still make up a minority of Alphabet's overall business, grew 29%, slightly faster than the growth rate in the second quarter of last year. Only YouTube's results disappointed, with growth about three percentage points below Wall Street expectations. Management blamed this on difficult comparisons and said that people are still switching from traditional TV to connected TV and that YouTube TV remains a competitive option.
That growth makes the stock look attractive, as it trades at 21.5 times expected earnings for the next 12 months. That's less than a percentage point higher than the S&P 500's 21.3 times, but Alphabet's profits are growing faster and it's considered particularly high-quality.
For those looking for opportunities amid Wednesday's sell-off, Alphabet should be one of the top picks.
Article forwarded from: Jinshi Data
