Alphabet had a strong Q2 with solid revenue and earnings gains, yet the stock was down 4%.
Alphabet (NASDAQ:GOOG) stock was down about 4% on Wednesday after the technology giant reported second quarter earnings.
However, the results were solid, as Alphabet beat revenue and earnings estimates and saw strong year-over-year gains. Revenue climbed 14% in the quarter to $84.7 billion, beating estimates of $84.3 billion. Net income rose 28% to $23.6 billion, while Alphabet’s earnings per share rose 31% to $1.89 per share, beating estimates of $1.85 per share.
So, what drove down the stock price on Wednesday? Let’s take a look.
Google cloud hits record revenue
There were several factors that may have caused Alphabet stock to fall on Wednesday and, for the most part, they don’t relate to the company’s performance.
The cloud business, which investors have been watching closely, had a great quarter, topping $10 billion in revenue for the first time. Alphabet pulled in $10.3 billion in revenue from the cloud business, up 29% year-over-year.
The Google search and advertising side of the business saw revenue climb 11% to $73.9 billion. Google Search alone, the largest segment of Alphabet’s income, saw revenue jump 14% to $48.5 billion.
However, the markets perceived some weakness in YouTube ad sales, which were up 13%, but fell short of revenue estimates. Also, advertising on the Google network was off 5% year-over-year to $7.4 billion.
“Our strong performance this quarter highlights ongoing strength in Search and momentum in Cloud. We are innovating at every layer of the AI stack. Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead,” Sundar Pichai, Alphabet CEO, said.
The disappointing sales numbers for YouTube and Google Network ads may have caused some of the selloff on Wednesday, but the larger and more influential segments of the business performed well. However, the primary reasons the stock price fell had nothing to do with earnings.
High valuations an issue
All the major indexes were down on Wednesday, led by the Nasdaq Composite, which was off some 475 points, or 2.6%. A lot of this had to do with Tesla’s (NASDAQ:TSLA) subpar Q2 earnings, as deliveries dropped 5% and earnings plummeted 45% year-over-year, worse than estimates.
This likely dragged tech stocks down, including Alphabet, despite its decent numbers.
But there is also the issue of valuations. Some experts have been predicting a correction, which is a considered an at least 10% drop in the markets, as stocks have become overvalued. Tesla had been way overvalued, with a P/E ratio of 63 and a forward P/E of 99. This is not sustainable, based on Tesla’s declining sales and earnings.
Looking more broadly, the P/E ratio of the Nasdaq is 32, which is higher than average, and the inflation adjusted Shiller P/E ratio is at 35, the highest since 2021, just before the market started to crash.
This could be part of that correction, mainly in large caps and tech stocks, but if that happens, there is a silver lining as it could present good buying opportunities.
Incidentally, Alphabet is not among those tech stocks that is overvalued. It has a P/E of 26 and a forward P/E of just 24.
This selloff today looks like a good opportunity to buy Alphabet stock, which has a median price target of $200 — 14% higher than its current price.
