Buy The Dip In Google Stock – Alphabet Inc (GOOGL)

Alphabet Inc (NASDAQ:GOOGL) posted solid Q2 earnings yet the stock is sliding. Should you buy the dip in GOOGL stock?

Google’s holding company Alphabet Inc (NASDAQ:GOOGL) delivered better than expected earnings results when it reported its Q2 earnings on July 24th after market close. This was a surprise since many analysts expected an earnings miss. Despite decent beat on both the top line and bottom line numbers, till date Google stock has seen a nearly 3% post earnings dip. Investors have ignored the earnings beat and concentrated on other crucial metrics of the tech behemoth. There were also high expectations for Alphabet to break out YouTube numbers which the company again refrained from doing so. This move might have also worked against the investor sentiment. GOOGL shares may be sliding down but this presents a good opportunity for long-term investors to accumulate the stock now.

Alphabet Q2 earnings recap.

The tech giant reported a GAAP EPS of $5.01 per share on revenue of $26.01 billion. Wall Street was expecting the company to report earnings of $4.49 per share and revenue of $25.6 billion. Google’s Q2 revenue grew 21% YoY. The company registered solid double digit revenue growth across all geographies. However, Alphabet is under pressure due to some margin compression, mainly due to the $2.7 billion European Commission fine and higher Traffic Acquisition Costs (TAC). TAC increased 28% YoY to total $10.4 billion while the fine reduced Alphabet’s operating income by 40%. The rise in TAC on a percentage basis is found to be highest in nearly decade. The aggregate 23% YoY decline in CPC has also not gone well with the investors. Alphabet CFO, Ruth Porat in the earnings call highlighted mobile search and YouTube as the biggest contributors to growth.

Some key highlights of Q2 earnings which investors might be overlooking.

Alphabet’s core advertising business continues to grow at good pace. Advertising revenues were up 18.4% to $22.67 billion, contributing 87% of the total revenues. Google’s advertising business at this rate could become a $100 billion business by this year. Google’s paid clicks are up 52% YoY further indicating the strength of the company’s advertising business. Google CEO, Sundar Pichai addressed YouTube as the company’s biggest bet and highlighted the accomplishments of the video platform in the earnings call. Tech analyst Victor Anthony is extremely bullish on YouTube’s prospects and states if YouTube was a stock it would be “worth at least $75 billion”. Google’s Cloud business is also seeing impressive growth with Sundar Pichai stating that in Q2 they closed three times more deals with big customers (worth more than $0.5 million) than last year. Moving on, Google’s other bets segment, which has been a major drag on the company’s earnings in the past, is also seeing good improvement. Alphabet’s other-bets revenue increased from $185 million in the year-ago quarter to $248 million in Q2 2017.

Technical set up.

It’s hard to tell how the stock price may move in the near-term but technical indicators do give us a good insight. With yesterday’ slide, in a bearish move Google stock has closed below its 50-day Simple Moving Average (SMA) on very high volumes. 50-day SMA has acted as a significant support level for GOOGL stock for the most part of the year. Now, the next level of support is at the 20-day SMA which stands at $961.19. Alphabet’s last closing share price of $969.03 suggests it is not very far from its 20-day SMA. A breach of this support level could put more downward pressure on the stock. Investors should closely monitor this if they happen to be looking for a good entry point into the stock. Moving Average Convergence Divergence (MACD) indicator is also trending downward indicating a bearish trend.

Playing GOOGL stock.

A recent The Street post reports that Google could face more EU fines in the future. Such reports could further dent investor sentiment and may create more near-term selling pressure on the stock. However, the long-term growth story of Alphabet is still intact. GOOGL stock has got few price target hikes and cuts after the Q2 earnings. The price target cuts have been marginal and still are much higher than the stock’s last close. Even analysts with price target cuts are bullish about Alphabet in the long run. TAC and CPC metrics would be under much more scrutiny by investors going forward. Investor’s willing to initiate positions in Google stock should closely monitor the technicals and use any further dips to buy into Alphabet shares.

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