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Market Pullback Creates Opportunity In Alphabet

Brad Kenagy

Shares of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) posted stellar earnings when they reported two weeks ago, but have since fallen along with the rest of the market. The GOOGL stock chart shows the big spike after earnings and since then, the stock has drifted lower.

So what does this mean for investors?

Strong Results for GOOGL Stock

Analysts were expecting revenues of $38.21 billion and GAAP EPS of $11.17 per share. Alphabet stock crushed expectation by reporting revenue of $38.94 billion and GAAP EPS of $14.21 per share.

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Source: TradingView.com

The strong results led to shares of Alphabet being up more than 10% the day after they reported earnings. This was the largest single day gain since July of 2015. Looking beneath the headline numbers for each major segment, you can see that each area showed growth above what analysts were expecting. The clear source of growth came from the “Google Other” segment, which is where the cloud division data is. In addition, YouTube was a strong point of growth as well. Two quotes from the conference call show the importance of YouTube and the cloud business.

The first comes from Alphabet CEO Sundar Pichai: “Q2 was another strong quarter for Google Cloud, which reached an annual revenue run rate of over $8 billion and continues to grow at a significant pace.”

And CFO Ruth Porat said, “In the second quarter, YouTube was again the second largest contributor of revenue growth. And really pleased with the ongoing momentum that we’re seeing here.”

Just look at the numbers they reported:

-Properties, $27.34 billion vs. est. $27.26 billion

-Ads, $32.6 billion vs. est. $32.58 billion

-Other, $6.18 billion vs. est. of $5.63 billion

Alphabet Share Buybacks and Regulatory Risks

One of the items investors may have overlooked in the earnings press release is the fact Alphabet authorized the repurchase of $25 billion in Alphabet class C stock, which is the ticker GOOG.

When you look at cash flow and the balance sheet, it is easy to see that Alphabet can support large share repurchases. Over the last year, Alphabet has generated over $27 billion in free cash flow, and as of the most recent earnings report, Alphabet noted that it had about $121 billion in cash and marketable securities.

Even with all the positives Alphabet has, one of the main risks in the stock is regulatory risk. “The head of the U.S. Federal Trade Commission said he’s prepared to break up major technology platforms if necessary,” according to a Bloomberg article.

In addition, as election season heats up over the next year, there will be continued talk on the Democratic side of aisle about breaking up large companies. Then on the other side of the aisle, President Donald Trump recently made news by accusing Alphabet of illegal actions. Therefore, GOOGL stock could be in the crosshairs of both political parties over the next year as the 2020 election approaches.

Bottom Line

The bottom line for Alphabet is they reported strong results, generate a ton of cash and have a stellar balance sheet. While there is a potential for regulatory risk and political risk, the company looks compelling right now. Buybacks only sweeten the pot. For now, pullbacks are opportunities in GOOGL stock.

As of this writing, Brad Kenagy did not hold a position in any of the aforementioned securities.

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