Alphabet's ( GOOGL) headline number looked tragic, but looks can be deceiving: Call it the "don't judge a book by its cover" earnings edition.
The instant reaction on Twitter -- along with the media -- sounded the panic alarm, but cooler heads have appeared in the stock. All it took was a quick dive under the hood of Alphabet to see the core business is incredibly strong, while the top line continues to grow at a rate that should not be achieved by a company of this size.
First, let's get the earnings per share miss out of the way. The company reported EPS of $10.12 vs. expectations of $12.46. Yes, you read that right. And it's right everywhere else you see bears pounding the table -- not only about Alphabet, but how this impacts the entire market. We can boil the miss down to three key items and none of them relate to weakness.
- Tax Rate: Compared to a year earlier, Alphabet's tax rate doubled from 9% to 18%. When we are talking about a company with revenue of $40 billion-plus in the quarter, along with $7 billion to $10 billion in taxable income, that's a major impact. And, it has nothing to do with how well the business is performing.
- Headcount: The company saw a significant increase in headcount, pushing selling, general and administrative expenses. The 21% increase in employee count kept pace with the 22% revenue growth (ex-foreign exchange). Again, not a concern.
- "Other Bets": Last year, Alphabet posted income of $1.458 billion from "Other Bets." This year? An operating loss of $550 million. The difference between those two numbers is the difference between an EPS of $10.12 rather than $13.13, and that's with the higher tax rate. The $550 million loss alone hit the company for 75 cents per share.
Revenue of $40.49 billion actually inched past the $40.3 billion Wall Street estimate. At those levels, it is basically in line with expectations, but we're talking about year-over-year growth of 20%, which is amazing. That bumps to 22% if we remove the impact of foreign currency.
I understand some profit-taking here. The stock was trading into May highs. Furthermore, it has enjoyed a run from the low $1,000 level in June back to highs with only the August retracement. This action has created a solid weekly chart for technical traders to follow. The $1,250 level has become support after acting as resistance. It is the meeting point of the summer-fall ascending triangle pattern. That's what I would use as a strike for put protection or speculative call buying. I'd likely drop to a $1,175 strike for stock replacement, but as a trader, the $1,250 level is key for the downside. On the upside, a weekly close above $1,280 gets me involved in the name, while a subsequent close above $1,300 gets me buying more.
You can hate on the bottom-line number if you want, but the company delivered a report consistent with everything investors should want from a mega-cap tech bell weather.
