Why Alphabet stock slumped on Wednesday

Google's parent company delivered a mixed earnings report.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Shares of Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) turned sharply lower on Wednesday, falling as much as 5%. As of 1:10 p.m., the stock was still down 2.1%.

The catalyst that sent the tech giant lower was its first-quarter earnings report, which held a few unhappy surprises for investors. 

So what

Alphabet generated revenue of $68 billion, up 23% year over year (up 26% in constant currency). Its operating margin of 30% was consistent with the prior-year period. The search leader delivered net income of $16.44 billion, which resulted in earnings per share (EPS) of $24.62, up just 7%. 

To give some context to that performance, analysts' consensus estimates were calling for revenue of $68.1 billion and EPS of $25.74, so Alphabet's revenue was in line with expectations, but profits were lacking. CFO Ruth Porat cited headcount as the primary driver of higher operating expenses. 

Both of Alphabet's major segments experienced slowing growth, as the Google services segment grew 30%, while the Google Cloud segment climbed 44%, bringing its run rate to more than $23 billion. 

Investors seemed to focus on the tepid results of YouTube advertising, which grew 14% year over year, a far cry from the 49% growth in the prior-year quarter. At $6.87 billion, its ad revenue fell shy of expectations of $6.9 billion, dragged lower by the war in Europe, a suspension of services in Russia, and the increasing draw of TikTok. 

Management announced that the board of directors had authorized an additional $70 billion share buyback, suggesting it believes the share price has fallen too low.

Now what

Investors' "what have you done for me lately" attitude is a bit perplexing, particularly given the love affair Wall Street was having with Alphabet just three months ago. Its upcoming stock split notwithstanding, there is plenty of growth ahead for the Google parent, as digital advertising takes a growing percentage of overall ad revenue. This reaction also helps illustrate the short attention span of some investors.

Those with a longer-term mindset will no doubt focus on the broad secular trend and the massive opportunity that remains, rather than a single quarter of results, which makes Alphabet an unqualified buy. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Danny Vena has positions in Alphabet (A shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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