It's rare for a company as large as Alphabet (GOOG 0.81%) (GOOGL 0.72%) to move by double digits in a week, but that's exactly what happened following the Google parent's earnings report Tuesday night. While Alphabet actually beat estimates on the top and bottom lines, investors seemed disappointed with weaker-than-expected results from its cloud division and a narrower operating margin than analysts had forecast.
According to data from S&P Global Market Intelligence, shares of Alphabet's Class A (NASDAQ: GOOGL) stock were down 10% as of Thursday at 1:22 p.m. ET.
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Solid ad growth wasn't enough
Overall numbers from the quarter were solid as revenue rose 11% to $76.7 billion, topping analyst expectations at $75.9 billion. Growth in the quarter was paced by the core Google Search business, which reported 11% revenue growth, while YouTube was up 12%.
On the bottom line, earnings per share jumped from $1.06 to $1.55, ahead of expectations of $1.45. However, Alphabet does not adjust its generally accepted accounting principles (GAAP) figure, which benefited from lower income tax expenses and a decline in other expenses. Operating margin improved from 24.8% to 27.8%, benefiting from the layoffs the company announced earlier in the year, but that was below the analyst consensus.
Additionally, revenue growth in its cloud unit slowed from 28% in the second quarter to 22%, and profits fell as well, giving the impression that Google Cloud was losing market share to competitors like Microsoft and that cyclical headwinds may be impacting its growth.
After falling 9.6% on Wednesday, Alphabet shares declined as much as 3.5% on Thursday, seemingly in response to remarks in rival Meta Platforms' earnings report. Management's comments about volatility in the ad market heading into next year seemed to mar what was otherwise a strong earnings report from the Facebook parent.
Where does Alphabet stock go from here?
Though the stock fell sharply, Wall Street analysts generally responded to Alphabet's update with bullish commentary, reiterating their buy ratings on the stock. The company's dominance in search remains despite earlier concerns that Microsoft's Bing would take share. Meanwhile, macro concerns seem to be one reason for the stock's sell-off this week as treasury yields have tested new heights, with the 10-year yield briefly reaching 5% before receding.
Despite the post-earnings sell-off, Alphabet has tremendous competitive advantages and should benefit from the eventual recovery in the digital ad market. While the stock could remain volatile as investors fear a downturn, Alphabet stock is worth adding to your watchlist to buy if it continues to dip.
