Alphabet (GOOGL) is tumbling nearly 8% in Tuesday’s trading session, as the internet giant missed on both revenue and earnings estimates. Some of the issues were owed to the European Commission financial charges, but also worse than expected deceleration in business revenues as well.
Alphabet stock has a lot of disappointed bulls out today as the stock plummets. According to TipRanks, out of 29 analysts polled in the last 3 months, 26 rate a Buy on GOOGL while 3 are sidelined. The 12-month average price target stands at $1,341.69, marking a nearly 13% upside from where the stock is currently trading.
According to Alphabet, “given the announcement on March 20, 2019 by the European Commission (EC) of its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law and the associated €1.5 billion ($1.7 billion as of March 31, 2019) fine.”
Alphabet reported revenue and dil. EPS of $36.339 billion of $9.50 respectively, which compared to consensus expectations of $37.34 billion and $10.56, representing a miss on both revenues and earnings (when also including the impact from the European Commission fine). The impact from the European Commission fine was broadly anticipated, however the weakness tied to ad monetization metrics may have raised concerns. Alphabet also referenced F/x impact for some of the topline weakness.
Paid clicks on Google properties declined by -9% and cost-per-click increased +5%. Impressions on Google Network member properties grew by +5% whereas CPMs fell by -14%. The weakness tied to network member properties, and also Google properties contributed partially to the weakness in y/y revenue comps, as Google Advertising revenue grew by 15.3% or Q1’18 $26.642 billion to $30.72 billion Q1’19. Other business revenue grew 25.1% y/y, from $4.354 billion to $5.449 billion, and other bets remained largely flat from $150 million (Q1’18) to $170 million (Q1’19).
There wasn’t much helpful commentary tied to advertising revenues that would be indicative of some y/y acceleration in the USA whereas international could continue to grow. Perhaps, law of large numbers would be indicative of the advertising revenue deceleration, but historically Alphabet has generated revenue growth of 20%+ per quarter for quite a while now.
Some of the concerns noted by analysts on the earnings call pertained to revenue growth, which led to responses from Ruth Porat (CFO), which related to advertising inventory and advertising units changes, differences in comparative growth within YouTube’s engagement rates from prior year. And differences in results that could be tied to seasonality. When reviewing the advertising deceleration commentary, there wasn’t much commentary on how those figures could improve next quarter, or whether there would be improvements in terms of advertising metrics. Sundar Pichai, CEO also mentioned that US and Europe advertising result deceleration wasn’t based on demand issues, but rather product related features and balancing the user experience on the earnings conference call.
While, this will go down as one of Alphabet’s weaker quarterly earnings results, expectations may finally reset on the company, so revenue and dil. Earnings growth seem more beatable. Historically, Alphabet has had a number of quarters where revenue growth decelerated significantly more, such as 2012-2013, and also 2015-2016. So, weakness in revenue growth may prove somewhat temporary, as Alphabet’s dominant position in Search and various other categories like Video via YouTube results in organic ad-inventory growth along with pricing improvements.
The recent weakness is also owed to temporary set-backs related to EC related charges, so when results normalize in a couple quarters, and there’s more data to support an observable trend in deceleration, investors will have more datapoints. But, the recent quarter, and the weakness tied to advertising could prove temporary given the lumpiness in business results that Alphabet has reported historically. Therefore, the recent pullback might be an attractive set-up for longer-term investors looking for a chance to buy on a slight pullback until revenue growth starts to surprise.
Disclosure: The author has no position in GOOGL stock.