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Epic Fail for Google Parent Alphabet: Buy the Dip or Make a Run for It?

Last Updated September 23, 2020 12:41 PM
Lawrence Meyers
Last Updated September 23, 2020 12:41 PM

By CCN.com: Quarterly earnings from Alphabet showed alarming advertising growth deceleration as well as declining ad prices. Alphabet’s stock fell $95, or 7.3%, in response in after-hours trading. Does this signal the beginning of the end of the tech stock bull market or the market itself? In one respect, it provides more evidence of both scenarios and investors should be cautious.

Meanwhile, Gene Munster of Loup Ventures suggests that Google is the “oxygen of the internet,” advising investors “buy the pullback.” He’s looking at the longer-term picture despite an undeniably rocky quarter for Google.

Disastrous Growth

A revenue increase of 17% would be good news for most companies, but this is a decline from 28% growth in the year-ago quarter.  The revenue rise came on a 15% increase in ad sales, but that was down from 24% in the year-ago quarter.

Paid clicks skyrocketed 39% vs. last year, but once again, that’s down from the 66% increase in Q3 and 62% in Q4.

This tells us that advertisers are not finding the same value in Google search ads as they used to. Prices are declining, which should occur in a growing economy. It means those ad dollars are being pulled elsewhere, which means Google’s dominance may be faltering.

The reason Alphabet’s stock collapsed is simple. Investors give growth companies, like Alphabet, premium valuations because of their spectacular growth. Once growth slows, that premium contracts and investors flee.

Warning for Alphabet Investors

What does this mean for Alphabet’s stock? Has it seen its best days? GOOGL just hit an all-time high before earnings were reported. Tanking after hours like this does not bode well.

GOOGL stock hit an all-time high before the earnings debacle. | Source: Yahoo Finance

There has always been a sizable risk with GOOGL. It’s part of the FANG stocks, and just laying that moniker down for Facebook, Amazon, Netflix, and Google gave those stocks a “momentum halo.” Growth stocks like these are often driven more by momentum traders than actual investors. We see this in the steep drop in Alphabet stock price after-hours.

Yet this also speaks to overvaluation of the FANG stocks and tech stocks, not to mention the market.

Painful Collapse in Tech Stocks Ahead

Tech stocks are trading at levels that vastly exceed their growth rate. The SPDR NYSE Technology ETF and the Technology Select SPDR Fund own the largest tech names, including Microsoft, Apple, Cisco, Intel, Oracle, and Adobe. The metrics suggest the tech sector may be as much as 80% overvalued.

The overall market is at its fourth most expensive in history. The 10 year Schiller PE ratio is at 31.6.  The 2000 tech bubble and 1929 crash were previous highs.

That means that the market is pricing in earnings growth for the S&P 500 at 30% year-over-year. That’s absurd and impossible to achieve. Therefore, the market either has to go sideways for a very long time or, more likely, cascade down to the long-term average of 16.

The stock market is thus dangerously overvalued.

Profit Already Priced In

As for Alphabet stock, let’s look at valuation.

Backing out net cash of $113 billion, GOOGL stock trades at a market cap of $783 billion on trailing 12-month net income of about $30 billion. That gives it a P/E ratio of 26.

With slowing growth in an insanely overpriced market, investors should be very cautious with both GOOGL stock and the overall market.