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Google’s parent company Alphabet (NASDAQ: GOOG) reported its third-quarter earnings on Tuesday, October 24, 2023, after the market closed. The results were mixed, as the company beat analysts’ expectations for both revenue and earnings per share, but missed on its cloud segment growth. The Market reacted negatively to the news, GOOG dropping 9% on Wednesday, October 25, 2023, to close at $126.51 per share. This was the worst single-day performance for Google stock since October 26, 2022, when it fell 9.1% following an earnings miss.What Went Wrong for Google?
Google is one of the dominant players in the online advertising market, which accounts for most of its revenue and profits. The company has been benefiting from the increased demand for digital ads during the pandemic, as more people shifted to online activities such as shopping, entertainment, education, and work. However, as the economy reopens and consumers resume their offline behaviors, Google faces some headwinds that could slow down its growth.
One of the main challenges for Google is the tough year-over-year comparisons that it faces in the second half of 2023. In the same period last year, Google’s revenue surged 14% year over year, as it rebounded from the initial impact of the pandemic in the first half of 20202. This creates a high base for comparison that makes it harder for Google to maintain its growth rate in 2023.
Another issue that weighed on Google’s stock was the disappointing performance of its cloud segment, which is one of its key growth drivers. Google Cloud reported revenue of $8.41 billion in the third quarter, up 22% year over year, but below analysts’ estimates of $8.64 billion. The cloud segment also posted an operating loss of $1.24 billion, wider than the $1.09 billion loss in the same quarter last year.
Google’s chief financial officer Ruth Porat attributed the Cloud miss to “customer optimization efforts”, which implies that some of its cloud clients are cutting back on their spending or renegotiating their contracts. This contrasts with Microsoft’s cloud business, which reported a 28% year-over-year growth in revenue and a 34% increase in operating income in its latest quarter.
Is Google Stock Still a Buy?
Despite the recent setback, Google stock still has a lot of positives going for it. The company remains a leader in online search, video, and mobile operating systems, which gives it a wide moat and a loyal user base. The company also has a strong balance sheet, with $142 billion in cash and equivalents and only $13 billion in debt as of September 30, 20234. This gives it ample resources to invest in innovation and acquisitions to expand its product portfolio and reach new markets.
Google also has several growth opportunities that could boost its long-term prospects. The company is investing heavily in artificial intelligence, which powers many of its products and services, such as search, YouTube, Gmail, Google Photos, and Google Assistant. The company is also developing new technologies such as quantum computing, self-driving cars, and healthcare solutions that could create new revenue streams in the future.
Moreover, Google stock is not too expensive compared to its peers and historical averages. The stock trades at about 25 times its expected earnings for 2023, which is lower than the average price-to-earnings ratio of 29 for the S&P 500. It is also cheaper than some of its tech rivals such as Amazon (NASDAQ: AMZN), which trades at 54 times its expected earnings for 2023, and Facebook (NASDAQ: FB), which trades at 27 times its expected earnings for 2023.
Therefore, while Google stock may face some volatility and pressure in the short term due to macroeconomic headwinds and competitive challenges, it still offers a compelling value proposition for long-term investors who are looking for a high-quality tech stock with strong fundamentals and growth potential.
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Data Sources and Works Cited:
1. finance.yahoo.com, 2. cnbc.com, 3. pandaforecast.com, 4. macrotrends.net
5. finance.yahoo.com, 6. barrons.com, 7. bing.com, 8. history-computer.com
9. fool.com
