Shares of Alphabet (NASDAQ :), Google's parent company, has deviated from other mega-cap technology stocks after the power station of the digital economy reported it, which was disappointing. Since that release of late April, the divergence has deepened.
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After a strong 24% increase this year, Google's stock, which closed on Friday at $ 1,189.55, has fallen by around 8% since missing analyst sales expectations on April 29, with a record high of nearly $ 1,300.
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This happened at the same time that other members of the FAANG group, including Facebook (NASDAQ :), Amazon (NASDAQ :), and Netflix (NASDAQ :), continued their upward momentum
A deeper dive into Alphabet's most recent income release could help explain why investors are nervous about the company's future growth potential.
Numbers Shrouded in Secrecy
Without a doubt, the Q1 figures from Alphabet have greatly disappointed investors. The giant of the search engines not only noted the slowest revenue growth since 2015, but also showed that one of the largest revenue-generating companies, YouTube, is under pressure.
First-quarter revenue of $ 36.3 billion was roughly $ 1 billion compared to the analysts' forecasts. At the same time, earnings per share of $ 9.50 were significantly lower than the results for the same measure in the same period last year
Perhaps the biggest negative surprise that most tumbled the most since 2012 was that the weakness was omnipresent in all its important financial statistics. Sales increased by 17% on an annual basis, compared to 26% in the first quarter of last year, while the company's margins fell to 18%, compared to 25% last year.
As if all these setbacks were not enough, the Alphabet directors played an additional role in further dampening investor sentiment, by trying to wrap this poor quarter in a cloak of secrecy. Chief Financial Officer Ruth Porat has endeavored to alleviate YouTube analyst concerns by blaming exchange rate fluctuations and the timing of product changes to curb growth, without elaborating on what those changes were or why they delayed cause.
In a note to investors, Nomura Instinet analyst Mark Kelley said: "This quarter will undoubtedly result in a reset to future expectations, especially for the advertising world, as investors look for reasons for the fairly meaningful slowdown," but maintained his buy stock rating.
As we noted in our pre-earnings release article, Google will have a hard time keeping investors enthusiastic about its shares if marginal degradation continues and its executives are scrupulous about the company's future growth engines
The company has not separately disclosed the performance of its YouTube segment or its cloud revenues, although both companies apparently consume large portions of their new releases. These units are also considered crucial to Google's future growth, as the company's desktop advertising declines.
Amazon participates in Google Turf
Another potential threat that is currently affecting Google shares is the emergence of e-commerce giant Amazon as an important competitor for people who want to search for the products they want to buy. So far, the Google search engine was the first stop for consumers looking for products and online services, but that seems to be changing.
So far, this huge & # 39; moat & # 39; Google & # 39; s parent, Alphabet, enabled premium prices to be charged to companies and other advertisers who want to promote themselves in the digital space. But as Amazon's e-commerce business grows and the product range accelerates, the platform has also begun to transform into an alternative search engine.
From additional concern for Google: Amazon & # 39; s digital advertising franchise has become the fourth largest platform in the United States, just behind Google and Facebook, according to estimates from EMarketer, a research agency for digital trends
While sales in the first quarter, most ad-based, in Amazon's "other" segment increased by 34% to $ 2.72 billion, Google's growth in paid clicks dropped significantly by 39% compared with 66% and 62% in the two previous quarters. Although advertising revenues in the Amazon region are poor compared to Google's total advertising revenue, it is still large enough to limit the company's future growth, which of course determines the share price.
In an interview with Bloomberg TV, Porat tripped the threat from Amazon to the dominant position of Alphabet:
"Almost half of the advertising budgets in the United States are still spent offline. Ninety percent of US trade is offline and we aim to make digital products play a major role in this."
Bottom Line
Given the poor Q1 performance and the lack of visibility for 2019, we see that the Alphabet shares are still under pressure, at least in the first half of 2109. We do not recommend buying the shares after the 8% withdrawal from the record high because we believe that if the macro environment deteriorates, shares will be punished further and the technical sector can endure a new correction
That said, we do not think that Alphabet will experience a persistent period of weakness. The dominance in the search engine, advertising market remains difficult to break. In our opinion, an isolated sale in the range of 15-20% would be a good opportunity for everyone on the sidelines to acquire Google shares.
