Alphabet – GOOG stock – is getting its clock cleaned. This is somewhat odd as Google financials beat on revenue and earnings. What the market is focusing on is the revenue growth rate for the AI cloud portion of Google. This is to be a big portion of growth and future earnings for Google. There was some future growth baked in to the price of GOOG stock. So, with a miss in this area, the stock sold off heavily – the biggest down move in over a year.
Setting aside this one area at this one moment, is GOOG stock a good buy? Looking at Alphabet financials, there is likely a lot of upside potential. Simultaneously, the move lower is a good buy-on-the-dip contrarian move.
Revenue
Alphabet was expected to increase revenues somewhat, but the move higher to $76.69B was a bit more than anticipated. There were solid areas within performance. But, again, it was the revenue for cloud that have most sellers dumping GOOG stock. Revenue for YouTube & Search were both solid and continually improving. Search & YouTube both increased by 1% in revenue growth. Cloud missed revenue growth by 1%. Still, the difference added to the top line revenue.
The eventuality is that Cloud returns to positive growth. So, when there is a miss for one metric mixed in with other solid performance, this is an opportunity to take advantage of the markets disappointment with a longer look out ahead.
Projected Revenue
Final revenue has been adjusted upward for 2023 and 2024 still looks set to increase overall. But, I am still standing with the fact that the overall economy will slide slightly toward contraction. It is my firm belief that inflation is too sticky and that the Federal Reserve is going to have to raise interest rates slightly more. The idea would be to contract employment in order to relieve pressure on prices. The increased interest rates will affect the overall economy.
Given that stance, I can see revenues for 2024 sliding somewhat below expectations. The only question is if the Fed can ease growth downward without pushing the economy into a full-blown recession. If the Fed can engineer a gradual slide lower in inflationary pressures, with only employment sliding slightly, revenue growth for Google may remain solid – albeit, reduced.
The reality of a future decline in revenues and profits would mean overall that GOOG stock falls. But, that presents the question if during a normal economic landscape, how does Alphabet perform and would a sharp decline from an economic drop warrant buying GOOG stock?
Net Margins
Margins were a miss for Alphabet, despite growing higher. This is where I look and have a tough time with the numbers. While there was a solid performance across the board, the 25.7% net margins – well above average of the broader stock market, and above the Q2 report, the disappointment from the market is what presents the opportunity to buy the dip.
Overall, however, I remain constant that the economy is going to have to contract if nothing more, mildly. This would push GOOG stock lower but, for the economy rather than Alphabet’s ability to perform within a market.
Earnings Per Share
Projected earnings for 2023 – with one quarter remaining, have increased mildly. At the end of the day, this is what investors invest in: Earnings. While growth rates for AI Cloud portion of Alphabet’s business may have dragged lower, the selloff is overlooking far too many other aspects of the income statement. Increasing EPS are one of them.
Given a higher-than-average net margins, and continued growth expectations in EPS, Alphabet proves what it can do within a given economy. But, and as I continually reiterate as my thesis, I am bearish on the economy owed to the fact that the Fed is not yet done with interest rate increases – and, the subsequent contraction in the economy has yet to have its effect on Alphabet’s future earnings. I do not see how the $6.71 happens in 2024 simply because of the economic landscape that Alphabet will likely be in.
GOOG Stock
Overall, I like GOOG stock because of the yield from future earnings relative to GOOG stock price. Given the $6.71 for 2024, and the $127.50 GOOG price, this represents a yield of 5.25% versus the 10-year yield of 4.990%. But, if interest rates do in fact head higher, and are slated to remain higher for longer, stocks broadly will need to adjust downward. The economy will respond as consumers will have to entrench and build up their cash savings and pay off debt – at much higher interest rates. This will translate in to lower consumption across the board. Stocks, broadly, will sell – including GOOG stock.
I would look for a signal that the Fed is done with raising interest rates, that the consumer consumption has peaked, unemployment went higher and peaked, and stocks look bottomed. Alphabet stock is a company that can produce higher rates of net margins with a lower rate of Price-To-Earnings multiple. That is a good company to get in to. Then, it is a solid performing stock to hold on to for some time.