Google’s parent company Alphabet (NASDAQ:GOOG) reported its earnings last night. The results were disappointing and Alphabet shares are set to open around 8% lower today as a result.
As I see it, there were two main disappointments. The first is that revenue growth slowed significantly. The second is that increased expenses led to lower earnings.
Neither of these is a good thing, but I don’t think that they justify a 33% decline in the stock since the start of the year. As a result, I’m seeing this as an opportunity to buy Alphabet shares.
Revenue
Over the last decade, Alphabet’s revenue has been growing at an average of 20% per year. Last night, the company reported earnings growth of 6%, with the core advertising business up 3%.
Management put the slow growth down to declining advertising budgets among customers. Most notably, this came from cryptocurrencies and debt-related products.
I think that the slowdown in revenue growth will have surprised a number of investors. I believe that a lot of Google shareholders thought that its customers viewed it as indispensable.
Personally, I didn’t think this. While Google offers a powerful platform for advertisers, I didn’t expect it to prove immune to the effects of lower marketing budgets.
I’m therefore not surprised by the slowing growth. I actually think that a 6% revenue rise in a difficult economic environment is very respectable.Â
Income
For me, the decline in earnings is much more significant. Last night’s earnings revealed that Alphabet’s operating margin had decreased from 32% a year ago to 25% last quarter.
This, for me, is more alarming. I didn’t expect Google’s operating costs to increase as significantly as they have done.
In response to this, management said it intends to make the company more efficient. This involves slowing the pace of hiring and scrapping some of its more cash-intensive projects.
The company’s ability to control its costs is something for me to watch closely moving forward. Part of my reason for investing in the stock was because the business could maintain high margins.
As such, I welcome the decision to pause some of its less rewarding projects. Focusing on its core operations right now looks to be the right thing to do.
Should I buy more Alphabet shares?
Over the last 12 months, Alphabet has produced just over $5 in earnings per share. That has been steadily declining through each of the last four quarters, though.
If Google stock falls below $100 per share, then that will put the stock at a price-to-earnings (P/E) ratio of under 20. At that price, I’d look to add to my investment.
I’m expecting the next year or so to be difficult for Google as advertising budgets continue to come under pressure in a difficult macroeconomic environment. But that doesn’t put me off.
Fundamentally, I think Alphabet is an extremely strong company with a terrific product that it’s nearly impossible for competitors to emulate. Over time, I think this will pay off for me.