Alphabet stock plunges 6%
Alphabet shares are down over 6.5% in extended hours trade after missing expectations in the latest quarter.
Alphabet Q3 earnings miss the mark
Alphabet reported a 6% year-on-year rise in revenue in the third quarter to $69.09 billion and a sharp 24% drop in diluted EPS to $1.06 from $1.40 the year before.
That disappointed Wall Street, which had expected revenue of $70.86 billion and EPS of $1.25.
That marks the slowest revenue growth on record since the second quarter of 2020, when the pandemic caused significant disruption for most businesses. Stripping that out, it is the slowest topline increase Alphabet has delivered in almost a decade.
It is worth flagging that the strong US dollar was a headwind, with revenue rising 11% at constant currency, and that it faced some tough comparatives from last year when revenue jumped over 40% as it reaped rewards during the pandemic.
Alphabet confirms it is a tough time for advertisers
Alphabet is one of the largest online advertising companies in the world thanks to its monopoly through Google Search and the popularity of YouTube, but the juggernaut saw demand fall further than anticipated in the third quarter.
Google Search saw revenue rise just 4.3% to $39.5 billion and that fell short of the $41.0 billion forecast by analysts. YouTube also delivered a huge disappointment as revenue dropped 1.9% from last year to $7.0 billion, a tough result to swallow considering analysts had expected this to increase by over 4%.
We have already seen signs that businesses are scaling back their marketing budgets, especially as a recession looms on the horizon. The hope was that Alphabet’s position in the market and unique edge over its competitors would allow it to prove more resilient than some of its rivals such as social media stocks, but it is clear that even the biggest players are feeling the pressure.
We saw Snapchat owner Snap report its slowest quarterly revenue growth on record last week and the results out from Alphabet will have investors feeling particularly nervous ahead of Meta’s results due out later Wednesday. Fears that Facebook has reached its peak could be reignited today considering Wall Street believes it will lose over 100 million users during the third quarter and have pencilled-in lower revenue and a sharp drop in earnings thanks to slower growth, softer demand, pressured pricing and rising costs. Meta is trading over 4% lower in extended hours following the update from Alphabet. You can find out what to expect today in our Meta Q3 Earnings Preview.
Google Cloud shines bright but is still in the red
Google Cloud was a bright spot for Alphabet this quarter after revenue jumped 38% to $6.86 billion. The vital nature of cloud computing means demand here is still strong, although we have seen this rate of growth slow compared to what we saw last year.
Plus, Google Cloud remains a notable drag on the bottom line even if it is providing momentum to the top. The unit saw its operating loss swell to $699 million in the third quarter from the $644 million loss we saw last year – and this was also wider than the $650 million loss anticipated by analysts.
The fact it is still burning through cash is significant as the two largest players – Amazon and Microsoft – are reaping significant profits from their cloud computing operations. Google Cloud is thought to be the third largest cloud computing company in the world with a 10% market share, according to Statista, trailing Microsoft Azure at 21% and Amazon Web Services at 34%.
That places Alphabet in a bit of a situation. Advertising is what makes all the profit but is suffering from the most severe slowdown in years, while Google Cloud is propelling the topline even as the economic climate becomes more challenging but is still in the red. That could put profitability under further strain if it persists. Alphabet’s operating margin is already feeling the pressure, having contracted to just 25% in the third quarter from 32% last year.
Alphabet said it will slow the pace of hiring for the rest of this year in response to slower growth and waning profitability, although this is unlikely to be enough to relieve all the pressure on margins. It hired 12,700 new staff in the third quarter but will hire less than half of that figure in the fourth. Alphabet’s workforce has grown to somewhere in the region of 170,000 today from just 114,000 before the pandemic hit.
Where next for GOOGL stock?
Alphabet shares are down 6.5% in extended hours trade at $97.60, wiping out the gains booked over the past two weeks since the stock rebounded from a 21-month low.
The ceiling seen in January 2021 of $95.60 has now resurfaced as a level of potential support before the 21-month low of $94.40 comes back into play. Any drop below here opens the door to new lows, potentially toward $91.30, which acted as a level of resistance in late 2020 that turned supportive in early 2021. A sharper fall, possibly toward $85, would be on the cards if this fails to hold.
The stock managed to briefly recover back above the $104 level and test the 50-day moving average yesterday before the results sent the share price tumbling, meaning this will now need to be recaptured again. Any momentum from here would allow it to recapture all three moving averages before looking to return to the 200-day moving average at around $120, in-line with the ceiling we saw in May and July.
Take advantage of extended hours trading
Alphabet released earnings after US markets closed yesterday and this means most must wait until they reopen today before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.
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