The Mountain View, Calif., company reported Monday after the close that first-quarter revenues was $36.3 billion. Although sales continue to grow, the pace was about $1 billion shy of the level that analysts have been modeling. Shares tanked in after-hours trading.
And that's probably a buying opportunity for long term investors.
Regardless of the evidence, both Alphabet and Facebook continue to face concerns about the health of digital advertising. Every quarter, it seems, the two companies are rocked by an ad fraud scandal, or news that an old economy company is abandoning online advertising.
The chief executive at Restoration Hardware (RH) - Get Reportmade headlines in 2017 when he went on record saying digital ad campaigns are a waste of money. And officials at a Baidu (BIDU) - Get Report affiliated company have been implicated in a giant Chinese ad fraud scheme.
Quarterly financial results that miss consensus estimates add fuel to the narrative digital is broken.
The reality is, on a net basis, advertisers are not pulling ads from Alphabet's digital platform. We know this because unit and overall sales are increasing. In the fiscal first quarter, revenues shot up 17%, year over year.
However, in the first quarter, ad rates declined faster than expected. That alone is the reason for the shortfall with expectations. It has happened in the past, and it will likely happen again in the future.
Google AdWords is built around the auction of key words in Google search. In addition to the key word, the platform allows ad buyers to target searchers by time, geography and other metrics. When the searchers click through on the ad, Alphabet gets a higher fee.
The problem is most search now occurs on mobile phones. Searchers are clicking through less, so rates are falling. Google is serving more ads, at lower prices. The decline is expected and manageable.
By contrast, ad buyers are pulling money from television, outdoor and print media.
Almost all of that money is being redirected to digital. It just so happens that Facebook and Alphabet together, own about 70% of the marketplace. It's true, Amazon.com (AMZN) - Get Report is coming on strong. Microsoft (MSFT) - Get Report also has properties that can be monetized.
It's wrong to draw the conclusion digital ads are dying because AdWords rates fell faster than expected at Google for one quarter. It mistakes the forest for trees. Digital is the future of advertising because, unlike TV, radio or billboards, it can be measured.
Ironically, it's the reason AdWords prices are falling.
And investors are short-sighted to bet against YouTube, Google Search, Maps, Gmail and the rest of Alphabet properties. They are among the most popular destinations on the internet.
Alphabet shares reached a new record high Monday before the earnings report. I expect the stock will find support near the 50-day moving average at $1,192, if it gets that low, and begin rallying ahead of its developer conference next week.
Shares trade at 23.6x forward earnings, and 6.5x sales. That is rich but not excessive given the fact that many Google properties that have yet to be fully monetized, and the longer term potential of its other technologies like self-driving cars, drug discovery and YouTube.
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The author owns the following shares mentioned in this column: Alphabet, Microsoft and Amazon.com