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  1. Home
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Don't Misread Alphabet's Earnings

Despite an EPS miss, Google's core business is incredibly strong, while the top line's growing at a great clip -- here's how to play the stock now.
By TIMOTHY COLLINS
Oct 29, 2019 | 12:01 PM EDT

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.
  1. 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.
  2. 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.
  3. "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.
 
 
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At the time of publication, Collins had no position in the securities mentioned.

TAGS: Earnings | Investing | Options | Stocks | Technology | Stock of the Day

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