April 29, 2019 - Alphabet Shares Hit Record High But Fall After-Hours On Weak Earnings

Market Analysis

Google’s parent Alphabet Inc. Class A shares (NASDAQ: GOOGL) last traded at $1,202 USD after falling -$94.20 (-7.27% lower) in after-hours trading due to a lackluster earnings report released after the bell.

Prior to the earnings release, shares closed the day at a record-high $1,296.20 US after rising +$18.78 US (+1.47% higher).
4-Year (weekly candle) chart of Google's parent Alphabet Inc. (GOOGL)
The chart (above) shows that Alphabet Inc. shares have steadily risen since January 2015. It also shows that the stock’s technicals have already reached mostly over-bought levels:

Starting from the bottom indicator, the Patyk Pattern (white line) based upon the MACD shows, when placed near the candles, that there is substantial room to the downside.

Things don’t get any better when the Stochastics (green line) indicator shows extreme bearishness at this time due to its current position right along the ceiling.

The RSI, while only near 80, is still an extremely high level especially when factoring its previous peaks over the past 4 years and thus also shows more bearishness.

How far could the stock fall? Utilize the 50-day, 100-day, and 200-day simple moving averages as downside targets (pink, purple, and blue respectively).

Shares also closed in the upper echelons of the Bollinger Band (yellow lines) range which signals that there is more room to fall than to rise.
1-Year (4-Hour Candle) Chart of Alphabet Inc. Class A (GOOGL)
Zooming in on the 1-year (4-hour candle) chart of Alphabet Inc. (above) we can see that the technicals are no better. In fact, they are worse, since this time we are AT the upper Bollinger Band (yellow) already.

Meanwhile the Stochastics (green line) indicator is just as elevated as the previous (longer-term) chart showed with ample room to fall in the immediate future.

On this chart, I’ve included a Fibonacci retracement based upon the July 27th, 2018 high of $1,291.44 US and December 24th, 2018 low of $977.65. Presently, the 50% Fibonacci sits at $1,134.55, which is a very reasonable downside target. This level also happens to be very near the 200-day moving average.

Year-to-date, the stock has risen +$251.24 US (+24.04% higher) to today’s closing price of $1,296.20 US. This doesn’t bode well for the company since we could now see a significant decline in its share price even if the entire stock market doesn’t crumble.

GOOGL shares weren’t the only ones making record highs on Monday. Both the Nasdaq and S&P500 both closed at their highest levels ever. On Tuesday, markets will be watching closely as General Motors Company (NYSE: GM) announces its first quarter results before the opening bell followed by Apple Inc. (Nasdaq: AAPL) reporting second-quarter results after the close.

But while Alphabet Inc. stock closed at a record high today, the celebration was short-lived as the company announced its first quarter earnings report shortly after the closing bell. This caused it’s value to plummet as 1Q EPS came in only at $9.50 US (compared to a consensus estimate of $10.61 US per share (a negative surprise of -$1.11 US). This was much lower than the previous year’s Q1 when EPS came in at $13.33 US Vs. $9.35 US estimates.

Revenue for the quarter (excluding traffic acquisition costs) came in at only $29.48B US compared to estimates of $30.04B US. Q1 operating income (QoQ) was just $6.61B US compared to an expectation of $8.20B US.
Meanwhile, first quarter operating margin (shown above) came in at only 18% (QoQ) Vs. 21%. This represents a downward move since March of 2017. The Q1 cost-per-click on Google properties was -19% lower and the Q1 paid clicks on Google properties came in at just +39% compared to an expected +66%.

While quarterly sales missed estimates, one bright-spot (according to the company’s executives) is that the firm could gain traction in the cloud Vs. Amazon.com Inc. (Nasdaq: AMZN) and Microsoft Corporation (Nasdaq: MSFT). GOOGL currently sits in 3rd place behind the two when it comes to the cloud but this could improve, especially since the cloud pie itself is expanding.

While GOOGL’s earnings call indicated that the company delivered robust growth on mobile, the cloud, and on Youtube, as well as managing to reign in spending to $4.6B US, I’m not as convinced.
The chart (above) compares Alphabet Inc.’s weekly candles (since Jan. 2018) to where it’s stock would be currently trading had it grown as much as MSFT (Alphabet would be $1,675 US) and AMZN (Alphabet would be trading near $1,750 US).

Part of the company’s problems arise due to the threat of Amazon.com gaining significance. On Monday, investors concerns were sparked that marketing dollars could be shifting to competitors.

The company didn’t just say that headwinds were increasing from competition or talk much about Youtube and the controversy surrounding misinformation and hate being spread on their platform.

When you focus on the numbers, you’ll realize that it won’t be cheap to moderate what some have estimated to be 3 hours of video footage being uploaded each and every single minute to the platform.

Making matters worse, is the ongoing backlash against big tech by politicians such as Senator Elizabeth Warren playing the re-election card of looking to break up large firms such as Facebook and Google. While Alphabet Inc CFO Ruth Porat has stated (in response to the backlash) that the company needs to “up the bar on ourselves” that may not be enough.

In short, with higher regulation looming due to political pressures as well as ad growth slowing due to the looming threat of Amazon.com Inc as well as the bearish technical charts, now would not be the best time to go long on this stock. As if “Sell in May and Go Away!” wasn’t telling us that we are just one trading session away from historically the worst 6 months of the year for U.S. equitites (May to October), it is worth mentioning that with today’s record highs in both the Nasdaq and S&P500, it wouldn’t make sense to be purchasing ANY equities unless you are going short at this time.

Full Disclosure: Neither the author, the author’s family, nor the author’s companies own any position in GOOGL, AMZN, or MSFT. Disclaimer: Not financial advice. Seek services of a licensed financial professional before making any investment decisions. Not liable for any losses arising out of information being shared for educational purposes only. Do your own due diligence.

Copyright © 2019 - Robert Patyk & InvestingNetwork.com


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