Wall Street's Alphabet cloud temper tantrum
Shares of the Google/YouTube owner are getting hit hard Wednesday because cloud revenue didn't live up to the hype. It may be an overreaction. Growth was still strong.
Alphabet, the company that many still refer to as Google (especially since its ticker symbols remain GOGL and GOOG…at least Facebook went all in with the Meta Platforms revamp and even changed its ticker from FB to META), is getting whacked Wednesday after the company reported a slight miss in its cloud business. The stock is down nearly 10%. Investors may be overreacting.
For one, Alphabet still reported overall earnings and revenue that topped forecasts, thanks to growth in the core Google search/advertising business as well as solid ad sales gains at YouTube.
And even though Google’s cloud unit may have not lived up to Wall Street’s expectations, it’s not as if the division is struggling. Google Cloud’s revenue rose more than 22% from a year ago. The business also posted an operating profit of $266 million, reversing a loss from the third quarter of 2022.
Microsoft, which also reported its latest earnings after the closing bell Tuesday, posted 24% growth from cloud revenue. It was rewarded by Wall Street, with the stock gaining about 3%.
The knee-jerk reaction seems to be that Microsoft is cashing in more from artificial intelligence than Alphabet. The numbers don’t seem to bear that out. Alphabet simply just missed overly bullish forecasts by a small amount.
Alphabet’s stock is still up nearly 45% in 2023. So it may have been ripe for a bit of a pullback. The slump may not last long. Alphabet is expected to report solid gains in profits and sales for the rest of this year and 2024 and the Mountain View-based company also has a mountain of cash on its balance sheet: nearly $120 billion. So Alphabet can afford to spend a lot more on further cloud investments. And if all that weren’t enough, the stock now trades for less than 20 times earnings estimates for 2024…a bargain price for a big tech growth stock.
But when your stock is red hot, any hint of weakness (real or imagined) could lead to a sell-off. I think that’s the big problem for Alphabet today, not any actual deterioration in its cloud business.