Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) shares fell nearly 9% after its Q4 earnings report. This is despite the company beating EPS expectations by 2 cents and delivering double-digit year-over-year revenue growth. Did the market take things too far? Here’s what you need to know:
Google reported $96.47 billion in Q4 revenue, up 12% year-over-year. This missed estimates by $200 million. Net income grew to $26.5 billion and is up 28% year-over-year.
Plus, advertising revenue grew 10.6% year-over-year to $72.46 billion and Google Cloud revenue grew 30% year-over-year to $11.96 billion. This missed estimates of $12.19 billion.
Alphabet plans to spend $75 billion in 2025. This far exceeds the $60 billion analysts expected and they now think this aggressive CapEx could compress margins. Moreover, Google Cloud has decelerated from previous quarters and investors are doubtful about how well Google is competing against AWS and Azure.
Shares have surged over 33.7% over the past year due to how optimistic analysts were about Google’s growth, especially in cloud and AI. The recent earnings results have made them much less optimistic and shares have pulled back in line with the loss of confidence.
Alphabet’s current valuation is at 23 times forward earnings. This is much cheaper than most other Magnificent Seven stocks, though Google trailing in AI technology and not growing as fast is likely the case.
Nonetheless, the recent selloff has lowered expectations and Alphabet could still outperform in the coming quarters. Alphabet slightly outperforming in terms of EPS, and spending more on AI this year could help bring growth and profits in line with expectations.
For investors with a 2 to 3-year horizon, the pullback offers an entry point. However, expect volatility as the market digests capex plans and the cloud growth slowdown.