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Why Alphabet Stock Dropped 5% After Earnings

By Rich Smith - Jul 31, 2020 at 2:01PM

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Reports of a revenue drop shocked the market.

What happened

Alphabet (GOOG -0.55%) (GOOGL -0.61%) stock is worth $1 trillion again -- and that's not good news.

Before earnings came out yesterday (after close of trading), the internet search giant was trading at about $1,500 a share and sported a market capitalization of $1.05 trillion. Today, investors are selling the stock -- still down 4.5% as of 1:30 p.m. EDT -- and the Google parent's shares are back at the $1 trillion level.

White arrow declining sharply atop a stock tickertape display bathed in red.

Image source: Getty Images.

So what

And yet Alphabet didn't even miss on earnings yesterday. It beat.

Heading into earnings, analysts had forecast that Alphabet would earn only $8.21 per share on sales of $37.4 billion. Alphabet beat those numbers with a stick, earning $10.13 on sales of $38.3 billion.

So why is the stock down today? Well, for one thing, that revenue "beat" that Alphabet reported last night was kind of Pyrrhic. Yes, on the one hand, it was better than expected. But it still represented a 2% decline in revenue from Q2 last year -- the first time Alphabet has ever reported a decline in revenue from its business.

Likewise the earnings number. Alphabet beat on earnings, but it did so by reporting 29% less GAAP profit in Q2 2020 than it recorded in Q2 2019.

Now what

Don't count Alphabet out just yet, though. Amid all the bad news, there was also good news to report. Google search revenue might have declined, but YouTube ad revenue climbed 6%. Alphabet's cloud computing business, too, although nowhere near as big as some of its rivals', got 43% bigger in the quarter.

Meanwhile, despite the GAAP profits drop, with operating cash rising and capital spending falling, Google generated a stellar $8.6 billion in positive free cash flow in the quarter -- 23% ahead of reported net income and up 32% year over year.

Trading at roughly 32 times trailing free cash flow right now, Alphabet stock might not be cheap, but it's still an immensely cash-profitable enterprise, and it is growing its cash strongly.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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