I'll Buy This "Disappointing" Alphabet Stock Any Day of the Week

Based on expectations, it was a disappointment. Google parent Alphabet (GOOG -1.16%) (GOOGL -1.33%) produced $65.5 billion worth of advertising revenue during the fourth quarter. Analysts were expecting a figure closer to $66 billion. Alphabet stock stumbled more than a little after the numbers were released after Tuesday’s closing bell.

It’s yet another case, however, where the market may have lost sight of the much bigger bullish picture by fixating on one specific data nugget. There are still plenty of reasons to own Alphabet stock. The recent setback is another one.

Alphabet’s fourth quarter, up close and personal

Alphabet turned a total of $86.3 billion in revenue last quarter into operating income of $23.7 billion or a per-share profit of $1.64.

The bulk of that revenue was — unsurprisingly — produced by Alphabet’s advertising business, most of which still stems from search-based ads. The company’s search engine (Google) produced sales of $48 billion, while YouTube chipped in $9.2 billion worth of sales versus Google Network’s contribution of $8.3 billion. Subscription-based services and devices added another $10.8 billion to the top line, while Google’s cloud computing business saw sales of nearly $9.2 billion. With the exception of Google Networks, all these arms grew revenue on a year-over-year basis.

Chart showing Alphabet's revenue not only still growing since Q1 2019, but recently accelerating.

Data source: Alphabet. Chart by author. All figures are in billions of dollars.

Profit growth is still healthy as well.

The entirety of Google’s ad and subscription businesses generated operating income of $26.7 billion, compared to $20.2 billion in the same quarter a year earlier. The company’s cloud arm booked an operating profit of $864 million, which isn’t a huge amount for this particular arm. But it’s progress — that’s the fourth consecutive quarter Alphabet’s cloud business has boasted an operating profit, with Q4’s being the biggest one yet. All told, companywide operating income of $23.7 billion is a marked improvement on the year-ago comparison of nearly $18.2 billion. Per-share profits of $1.64 are correspondingly well up from Q4 2022’s figure of $1.05.

Chart showing all of Alphabet's profit centers driving earnings growth, reaching record levels in the final quarter of 2023.

Data source: Alphabet. Chart by author. With the exception of per-share data, all figures are in billions of dollars.

So what’s the problem? Again, it’s all about search-advertising revenue that came up short of expectations.

There’s the rub — and your opportunity.

The bigger picture is still plenty bullish

I get it. I really do. Alphabet shares had been edging higher since November, reaching record highs just a week ago in anticipation of a rock-solid, estimate-beating Q4 report. Advertising is still the company’s flagship business. If it’s going to top estimates (which the company did), it needs its biggest and most important business to at least do the same. It didn’t.

Arguably lost in all the pre-earnings and post-earnings noise, however, are a couple of critical facts.

One of these is simply that while overall ad revenue came up short of expectations, Google’s search revenue was still up a healthy 12.7% year over year. YouTube’s top line was up 15.5% year over year during Q4. The company’s network of affiliated websites suffered a slight 2% year-over-year dip in sales, but this is now Alphabet’s smallest advertising platform, accounting for about 15% of its ad business. That’s not exactly catastrophic.

Although traffic acquisition costs grew from $12.9 billion for the final quarter of 2022 to just under $14 billion this time around, that’s only an 8.5% increase — an increased cost that more than paid for itself. By the way, most of these arms’ revenue growth accelerated from paces seen prior to the final quarter of last year.

Perhaps the most errantly overlooked data point from Alphabet’s Q4 report, however, is the bottom line of the company’s cloud computing business. While operating income of $864 million on revenue of almost $9.2 billion is far from thrilling, bear in mind that this arm is still essentially a start-up. It’s not going to do especially well until it’s operating at greater scale.

That being said, Google Cloud may finally have the scale it needs to be a serious breadwinner. Operating profits have soared just within the past few quarters on much more modest sales growth.

Chart showing Google Cloud becoming operationally profitable since late 2022, and growing increasingly so.

Data source: Alphabet. Chart by author. All figures are in billions of dollars.

Given Mordor Intelligence’s expectations for the worldwide cloud computing market to grow at an annualized pace of more than 16% through 2029, don’t be surprised if Google Cloud’s bottom line continues to soar, offsetting any weakness from Google Networks (or even ad revenue that doesn’t quite live up to expectations).

Even sales of subscriptions and devices improved by $2 billion last quarter, offering compelling signs of life for a business that not many investors have taken very seriously … yet. Maybe now they will. This amount of non-advertising sales growth more than makes up for the size of the company’s ad-revenue shortfall logged for Q4 of last year.

Use this dip to buy Alphabet stock

The point is, keep things in perspective.

Investors are seeing the glass as half-empty rather than half-full right now — they’re rattled by a singular misstep arguably rooted in analysts’ unfairly high expectations. Had the analyst community not suggested any particular ad revenue figure for the quarter in question, Tuesday’s post-report plunge may have never materialized. These guessing games can easily get in investors’ heads, often leading them to the wrong, knee-jerk conclusions.

The good news is, reason always eventually prevails. Once the post-earnings-release dust settles and the market starts realizing Alphabet’s Q4 was actually a rather healthy one (thanks to a couple of profit centers outside of its ad business), don’t be surprised to see a recovery effort from the stock take hold. I know I won’t be surprised to see it happen.

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