Did Alphabet Wreck Tech?

| About: Alphabet Inc. (GOOG)

Summary

Total segment revenues increased by 17%.

Foreign exchange had a negative 6% impact to the top line.

The stock was priced for perfection so it is no surprise to see it down on this news after being up 43.7% for the past year.

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) reported first quarter earnings Thursday. On the surface the results were bad with the company reporting earnings of $7.50 per share (missing estimates by $0.47) on revenue of $20.26B (missing estimates by$110M). The stock moved quite a bit after it reported earnings, down 5.9% in after-hours trading. Before I begin to parse through an income statement, balance sheet, or cash flow statement I like to check out how the segment revenues did and see if there was anything glaring. Below is a table on how the company did during the quarter compared to last year.

Segment Revenues (millions)

2015-03

2016-03

Y/Y

Google advertising revenues

$15,508

$18,020

16%

Google other revenues

$1,670

$2,071

24%

Other bets revenues

$80

$166

108%

Total

$17,258

$20,257

17%

Click to enlarge

Overall revenues were more from this time last year by about 17% on the strength of every segment the company operates, but mainly from advertising revenues. What's interesting is that total paid clicks were up 29% from the prior year, but the problem might be that they were down 3% from last quarter. To contrast that investors saw total cost-per-click decline 9% from last year but remain flat from the prior quarter. The main culprits here were that ad growth at YouTube declined along with low smartphone search ad pricing; causing the cost-per-click numbers to decline. Another headwind to the headline is that foreign exchange rates had a negative 6% impact to the topline.

The overall market has been buoyant to the bad news of late from all the tech giants such as IBM (NYSE:IBM) and Netflix (NASDAQ:NFLX). I believe the same may be happen again on the back of this Alphabet "miss". So what if revenues and earnings missed expectations, this company reported a revenue increase of 17% or almost $3B from the prior year!

I like Alphabet and have been long the name since August when I began my portfolio. The 6.1% move down in after hours trading on 0.5x normal volume may just be investors taking a rest in the name after having been up 43.7% during the past year. Yes this quarter may have been disappointing for some, but it may just be a buying opportunity in disguise.

Now the troubling part is that ad sales are slowing from the prior quarter, but that could just be a seasonality effect as first quarter is always slow for the company in terms of ad sales. What would be interesting to see is if Facebook (NASDAQ:FB) reports something similar then it would be an industry wide phenomena, but if Facebook reports a good number then it can be assumed it is eating Alphabet's lunch.

Though the market has been resilient on the back of bad earnings reports lately it would be interesting to see how it closes tomorrow. If the market closes down then investors may be leaving the market altogether.

Alphabet's story is just a single stock story, but the market is an overall macroeconomic indicator of what is to come. The market has been rallying for the past few days and it was just time for a breather I think. So it would make sense that Alphabet sells off on the back of this news because it was trading at 18.8x next year's earnings estimates. With this earnings miss and with the stock near an all-time high it will not surprise me to see this name come down for the next couple of days. Don't forget the 6% headwind to revenues that foreign exchange had on the company, there is a lot of exposure overseas and if the globe is not having a fantastic time than neither will this company in the near-term. The core business is advertising, and if companies just are not advertising as much on the platform then either someone else is eating away at the pie or there just is not that much spending going on right now.

Intel (NASDAQ:INTC), Visa (NYSE:V), Microsoft (NASDAQ:MSFT) all recently reported bad numbers which speak to the enterprise side of the globe and they all painted an ugly picture of what is going on from a macroeconomic perspective.

Yes Alphabet was able to grow revenues by a whopping 17% and those numbers were great to me, but below what analysts were expecting. The company is not dying but when you couple it with the stories of Intel, Visa and Microsoft I think there are bigger things going on around the world and that is why I am about 32% cash now. Alphabet is the smallest position in my portfolio aside from some puts I own so I'm not too worried about my position.

I'm not concerned whatsoever with regard to the moonshots, or "other bets" as those revenues accounted for less than 1% of total revenues during the past quarter. I still think that Alphabet is a sexy story with a great outlook on near-term earnings growth prospects as well as long-term earnings growth prospects. I thought it was fairly valued before this earnings call and may actually become inexpensive after this report depending on where it closes in the next few days.

The business is still great with double digit growth potential for at least the next five years still, but like I mentioned before this may just be a story where Facebook is eating Alphabet's lunch. We will have to wait and see as Facebook reports earnings after the market closes on April 27th.

Consumer mobile search was a bright spot for the company as the company has been working to enhance the mobile search experience. The only explanation for the stock dropping has to be the profit side of the core business, but that will be the focus of a later article. I for one will look beyond this quarter as this is a long-term speculative play in my portfolio right now.

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long GOOG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.