Looking back on earnings this week there is one story that stands out; the crazy ride that owners of Alphabet (GOOG), Google’s holding company under the new structure, have endured. The week started with investors eagerly awaiting the first earnings report under the new structure.
The fact that for the first time we would see earnings segmented, at least to some degree, and be able to gauge the value of the core search business gave added interest to what is always an interesting report.
Alphabet knocked it out of the park. They beat expectations on both the top and bottom lines and the stock reacted accordingly, jumping around 10 percent in aftermarket trading immediately following the release.
By the close of business on Thursday, however, holders of the stock were left scratching their heads as GOOG had given up those gains and more, closing the day out nearly 5 percent lower than last Friday’s close. So, what gives?
First, let’s look at those results. Non-GAAP earnings per share were $8.67 versus $6.35 a year ago, representing a 36.5 percent growth rate. Revenues increased even more, rising 47 percent year on year to $21.3 billion. In an environment where company after company seems to be searching around for an excuse for poor performance, that was, to say the least, refreshing.
If everybody else is right and the strong dollar, China et al are such big problems for all multinational companies one can only imagine what Google’s numbers would look like without those things. The fact is, though, that in the three days following the earnings the stock did this:
When a high profile stock tumbles over 10 percent in three days there is usually a rash of articles penned that speculate as to why that might be. In this case though, a Google search for “Why is GOOG dropping” yields no really relevant results. I am sure conspiracy theorists would say that that is because the company is suppressing bad news about themselves, but the more realistic reason is because nobody can figure it out.
Certainly the market as a whole and large growth names in particular have had a tough time of it lately. Being dragged down by a general malaise is no doubt part of it but doesn’t explain such a huge move. Similarly the announced retirement of the very successful SVP of search, Amit Singhal, would have been a negative for some but he is being replaced by insider John Giannandrea, the current head of Artificial Intelligence and Machine Learning, so one would imagine there would be limited disruption combined with an innovative mind at the helm; hardly the stuff that stock collapses are made of.
It seems far more likely that the big drop in GOOG this week is more about intangible factors. Maybe people are aware of the report from Ned Davis Research’s Will Geisdorf that points out that the “biggest company in the world,” which Alphabet became on Monday, underperforms the market by a significant margin historically speaking.
I have pointed out this “law of large numbers” effect in terms of stock on a few occasions: beyond a certain size exponential growth becomes much more difficult while, at the same time, analysts, tired of being made to look like fools by a company that smashes expectations consistently, start to ramp up forecasts. In that situation, beats become almost impossible. In Google’s case though, they have been huge for a long time and still keep growing.
There is also no doubt some profit taking. It should be noted that Monday afternoon’s high represented an increase in the stock of over 50 percent since the beginning of July and a 17.4 percent jump in less than two weeks. There is no worse feeling for a trader or investor than losing profits like that, so after a run up selling begets more selling.
Whatever the reason though, the best way to view the dramatic collapse in GOOG this week after such a stellar earnings release is as a great opportunity. The “other bets” part of Alphabet contains a whole host of business units that are not yet making money but many, most notably Google Fiber, could be doing so quite quickly. That diversification and even the possibility of a spinoff or two is the answer to the large numbers problem. In addition there is still room for spectacular growth in the core Google and YouTube businesses while that plays out.
When the market behaves illogically we tend to think that there is something going on that we don’t know about, but often it is just the natural tendency towards exaggeration that is responsible. That tendency was evident in GOOG both in the initial upward reaction to earnings and now in the ensuing correction, but at these levels the stock is the definition of a buying opportunity.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.