Why We Don't Care About the "YouTube Problem" in Google Earnings

Google earnings sent the stock plunging 8% yesterday (April 30) thanks to poor growth in YouTube. And we don't care.

News broke late Monday night that Alphabet Inc.'s (NASDAQ: GOOGL) Q1 2019 report showed its slowest revenue growth since 2015. The media jumped on how YouTube may have played a big role in decreased growth.

Alphabet structures its business in such a way that it doesn't reveal any specific details about Google, YouTube, or any of its other properties. Rather, the company just reports its overall numbers - meaning investors have no knowledge on whether YouTube is profitable or not beyond what Alphabet reveals. That isn't much.

GOOGL earnings came up short of the predicted $10.60 per share on revenue of $30.04 billion. Its Q1 2019 revealed earnings were $9.50 per share with revenue of $29.48 billion.

Many investors on Wall Street are pointing to YouTube as the root cause. But the estimates didn't seem to take the $1.7 billion fine GOOGL paid in Europe into account.

If it hadn't been for the fine over advertising problems, GOOGL's earnings would have been $11.90 per share. Plus, the company's revenue grew by 18.6% in the last quarter alone.

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Here's what GOOGL's latest financials tell us - and why we aren't bothered by their results. In fact, there's something very unique about this stock...

Why Google's Earnings Slowed in Growth

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GOOGL's business can be broken down into three sectors: advertising, revenue, and "other bets" (non-GOOGL businesses).

So, for GOOGL's advertising, the sales growth rate was up 13% to $30.72 billion compared to the $27.23 billion from the same quarter last year.

However, GOOGL's "other bets" saw a 25% increase overall.

But the reason so many investors feel like YouTube is to blame is because of the number of "paid clicks" displayed in the report.

In Q4 2018, GOOGL's paid clicks grew 66%. But in Q1 2019, paid clicks only grew 39% from the same quarter last year. This means investors are worried that GOOGL's properties aren't growing traffic volumes at a significantly faster rate than the cost of advertising.

But we're not worried in the least. The problem here isn't that there wasn't growth, but that the growth was lower than Wall Street wanted.

In Q1 2019, YouTube continued to grow 15.31%. That's a slight deceleration in comparison to last year's Q1 growth of 24.43%. But 15% growth is still great.

GOOGL said pretty loud and clear that the company is expecting some turbulence as it modifies its operations. And the company is continuing on as planned - showing no signs of slowing down.

While paid click growth has declined, GOOGL is focusing its efforts on hardware and cloud-based businesses.

It's easy to get caught up in the polarizing news that the company's growth slowed, but GOOGL is still growing. In fact, its total profits grew by 143% last year.

So, Money Morning isn't going to overreact to the earnings news. GOOGL is considered a strong buy right now, as shares currently trade for $1,186.20. One analyst even expects shares will go as high as $1,420. That's a 20% increase.

Beyond that, GOOGL achieved a rare feat as an explosive growth stock. Our proprietary Money Morning Stock VQScore™ system gave GOOGL a strong VQScore of 3.75. That puts it near the "Buy Zone," despite already surging 140% higher over the last five years.

GOOGL is looking great as it continues to be profitable - putting it on Money Morning's "tech stocks to buy" list.

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About the Author

Daniel Smoot is a Baltimore-based editor who helps everyday investors with stock recommendations and analysis. He regularly writes about initial public offerings, technology, and more. He earned a Bachelor's degree from Towson University.

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