The fate of earnings season may be decided with the action in Alphabet (GOOGL) over the next few days. We still have Amazon (AMZN) , Facebook (FB) , Microsoft (MSFT) , Intel (INTC) , and Visa (V) but Google may very well set the tone for what's to come. I suspect Facebook will be scrutinized today as well.
After the close Monday, Google announced revenue and earnings per share that exceeded Wall Street estimates. The stock initially gapped higher, before fading to unchanged after hours, and is down 5% in Tuesday morning trading.
I don't see a major red flag from the technical side until Google closes below $1,000. Unfortunately, that equates to about 7% downside before I'd stop out of any long position. While 7% isn't out of the ordinary, the $70+ will raise eyebrows on some folks, so you have to approach this one in terms of percentages, both in how you position yourself in terms of capital and how you utilize stops or targets.
Google's report offers both bulls and bears an opportunity to be selective and create a narrative that supports their current position. I have no position, which normally would be considered somewhat bearish; however, Google doesn't fit my current trade profile, so I'm not sure I'd buy it lower (or higher), which leads me to believe that I'm as close to neutral on the stock as I can possibly be. Newsflash, no one can be absolutely neutral despite what they tell you.
Ironically, neutral is kind of how I see this report. A better description might be maturing or changing. This isn't your father's Google any longer. Expenses are climbing, margins are shrinking, the bank balance balloons higher, and the growth steadies. Google probably has yet to reach full maturation, but gone are the days of hyper-growth. You simply can't do it time and time again when your market cap approaches a trillion dollars.
The "beat" comes across a bit hollow for me. It still counts, don't get me wrong. Cash in the bank is cash in the bank, but when we are determining value based on a quality of results, this quarter leaves a little something to be desired.
-- Google reported a huge $3 billion gain on equity securities, which included Uber and AirBnb. That not only added $3.40 to the quarterly earnings, but also drove the tax rate lower to 11% from 20% a year ago. This lower tax rate bumped income by another $1.46. Those are huge numbers that Google absolutely needed to offset lower margins of 22%, down from 27%, and higher expenses.
-- One-third of the big jump in expenses went toward real estate, but the $7.7 billion number this quarter is a bit eye opening.
-- The positive takeaway from this is the company did expand its cloud computer and hardware position with that increase capital expenditure. This "Google other" area, which also includes Google Game and Google Apps, grew 36% to $4.35 billion. A focus here should be a driver as Google culls some of its "other bets."
-- For the first time since 2014, the company also disclosed Nest results of $726 million. Unfortunately, that carried an operating loss of $621 million. Perhaps, it will become something one day, but a focus on Waymo and the cloud will likely yield better long-term results.
-- Google swears it is ready for GDPR (General Data Protection Regulation) in Europe and headlines are talking about how the Cambridge Analytica mess has had no impact, but I don't think we've had enough time to measure impact. GDPR won't kick in until the end of May and we really haven't heard from regulators in the United States yet.
Even though a big percentage of Google search, the company's main revenue driver, comes from keywords, 20% of the revenue still involves some sort of personal data. Despite the company downplaying these potential negative catalysts, they aren't going to be good for growth.
How I'd Trade the Report
Seeing the direction Google is taking toward the cloud makes me more optimistic about names like Applied Optoelectronics (AAOI) and Finisar Corp. (FNSR) as well as Intel (INTC) and even Cloudera (CLDR) .
The worries about regulation continue to drive me back to The Trade Desk TTD. I've discussed that name in depth around Facebook and I'll mention it again here.
Lastly, I believe Google could do well using some of its cash hoard or stock to scoop up a name such as Alarm.com Holdings (ALRM) or Control4 Corp. (CTRL) and wrap Nest or Google Assistant into every smart home. These are the two go-to companies for most new homebuilders, so why not get a tie up?
ALRM's market cap is $2 billion and Control4 is a tiny $565 million bargain. These are the names I would look to play off the Google results rather than Google itself.
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