Alphabet stock fell following Q1 report. Is it a buy?

Stock performance for the technology giant is now flat over the last 12 months.

| More on:
Woman looking at her smartphone and analysing share price.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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

We're in the heart of earnings season, with the mega-cap technology stocks all set to report first-quarter results this week. With trillions of dollars in market cap, these are the most important earnings results to determine the health of the U.S. economy and financial markets. Alphabet (NASDAQ: GOOG), the parent company of Google, YouTube, and Android, reported its Q1 earnings after the market closed on April 26. The report looked good, but investors decided to sell off the stock Wednesday because the company fell short on earnings per share and revenue estimates.

The stock is down about 2% since the report and down 7% in the last five trading days. After its post-earnings dump, Alphabet stock is down about 1.5% over the past 12 months.

Given the latest earnings report and the recent stock performance, is it a good time to buy shares?

Q1 results actually looked solid

For the first three months of 2022, Alphabet generated $68 billion in revenue, up 28% year over year. The company continues to show strong levels of profitability, with operating income of $20 billion, equating to an operating margin of 30%. Google Search is still the majority of Alphabet's business, and contributed the most to its growth in Q1 of 2022, with revenue jumping from $31.9 billion a year ago to $39.6 billion this quarter. It also got solid contributions from Google Cloud, which grew revenue 44% year over year to $5.8 billion. 

Alphabet has phenomenal profit margins, but it is still investing like crazy to grow its business. For example, on the conference call management said it would be investing $9.5 billion in office space and data centers over the next year, and that the company has spent $40 billion on research and development (R&D) over the past two years. If Alphabet can get a return on these new employee hires and all this R&D spending, it will hopefully keep revenue growing at a double-digit rate for the foreseeable future.

Valuation and buybacks make for a great combination

Over the last 12 months, Alphabet has generated $69 billion in free cash flow. This comes while the company is making major capital investments (mentioned above) and it is burning approximately $1 billion a quarter each on Google Cloud and Other Bets. With a market cap of $1.5 trillion, the stock trades at a trailing price-to-free cash flow (P/FCF) of 21.7. This is lower than the average stock in the Nasdaq Composite Index and would be even lower if management decided to stop investing for growth in its Google Cloud and Other Bets.

Alphabet is also returning cash to shareholders through share repurchases. In Q1 alone, it spent $13.3 billion on share buybacks, and it has reduced its share count from around 690 million a few years ago to 660 million today. This helps remaining shareholders by increasing free cash flow per share. In conjunction with its Q1 results, Alphabet announced a new $70 billion share repurchase program, so investors should expect the share count to continue to fall over the next few years.

GOOG Shares Outstanding Chart

GOOG Shares Outstanding data by YCharts

So should you buy shares?

Investors are concerned about Alphabet's stock right now for a few reasons. First, Other Bets continues to lose money at a rate of about $1 billion a quarter. And at Google Cloud, revenue continues to grow quickly but operating leverage is not yet showing up, with the division putting up a $931 million operating loss in Q1. On top of this, YouTube's revenue growth slowed down to only 14% in Q1 because of competition from TikTok and a reduction in time spent on video with pandemic restrictions loosening.

But here's the thing: The core Google business is so profitable it doesn't matter if Google Cloud and Other Bets continue to lose money. At a P/FCF close to 20, a steady share repurchase program, and the core Google business growing at 10%-plus a year, Alphabet stock will be much higher five years from now, no matter what is happening in its other divisions. That makes the stock a buy right now on this post-earnings dip. 

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

Brett Schafer has no position in any of the stocks mentioned. 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 Scott Phillips.

More on International Stock News

Woman using Pintereset on an iPad.
International Stock News

Pinterest is down 78% — Is it time to buy?

A sudden leadership change has made this question all the more relevant.

Read more »

Man looking amazed holding $50 Australian notes, representing ASX dividends.
International Stock News

3 passive income secrets for dividend investors

You'll make a lot more money if you know how to find and keep dividend payers in your portfolio.

Read more »

woman preparing Moderna vaccine
International Stock News

3 things about Moderna that smart investors know

There's more to Moderna than its COVID-19 vaccines, which investors may not appreciate fully.

Read more »

catapult share price
International Stock News

Which under-the-radar cryptos could pop after this year’s big soccer tournament in Qatar?

Based on what we saw after football's Big Game in February, the upcoming Big Soccer Tournament in Qatar could be…

Read more »

Happy family watching Netflix together.
International Stock News

3 reasons Netflix should bounce back in July

Shares of the streaming video giant have plunged by 70% in 2022 so far. But everybody loves a good comeback…

Read more »

A woman in colourful outfit holds up a phone to take a selfie.
International Stock News

3 reasons why Apple stock is a buy

The famed tech company has what it takes to bounce back from 2022's market downturn. Here's why.

Read more »

a water tap is turned on and showering out banknotes into the open hand of a woman below it.
International Stock News

Companies with high free cash flow margins and high free cash flow yields massively outperform the market over time

What matters for long-term investing success.

Read more »

Woman on her laptop thinking to herself.
International Stock News

Is it time to load up on beaten-down growth stocks (like Tesla)?

Here's a look at some issues facing both the markets and one electric-vehicle maker in 2022.

Read more »