Wall Street sometimes gets so latched on to one metric in a quarterly report that it fails to examine the report as a whole. This results in a falling stock price. Alphabet (GOOG 0.94%) (GOOGL 1.00%) experienced this after its earnings report, as its stock is down more than 10% since then.
This looks like a buying opportunity for one of the world's most prominent companies. If you're wondering why I have a contrarian view to the market and why now is a great time to take action and buy Alphabet's stock, read on.
Google Cloud didn't have the best quarter
In the crosshairs for analysts was Google Cloud revenue. It missed expectations by only growing by 22%. In a vacuum, that would seem like a decent growth rate. However, Google Cloud is in third place in the overall cloud computing market share, behind Amazon Web Services (AWS) and Microsoft Azure.
Additionally, its operating profit decreased from the second quarter's $395 million profit to just $266 million in the third.Google Cloud's operating profit had increased steadily before this quarter, so this may be another point of concern for Wall Street.
In previous quarters, Google Cloud was the fastest-growing of the trio, which kept investors hopeful that Google Cloud was slowly making up ground. But those hopes were shattered in Q3 because second-place Azure reported 29% growth.Wall Street latched on to this data point and threw out many others in this conclusion. Furthermore, when it reacted, it sent the stock down dramatically.
This seems like the wrong move, especially considering other strong points in the quarter.
Alphabet's stock looks like a bargain
Overall, Alphabet's Q2 revenue growth was robust at 11%. It also improved its margin significantly, with its operating margin ticking up from 25% to 28% from last year. This was helped by decreasing its employee headcount year over year, which was a large focus point for investors just one year ago.
Looking deeper under the hood of Alphabet also reveals some interesting points. YouTube advertising rose 12%, indicating ad spending is starting to return to social media platforms.This trend is expected to continue, helping to fuel future revenue growth.
Alphabet's stock valuation is also looking attractive following its fall from grace.
GOOG PE Ratio data by YCharts
At 24 times trailing earnings, Alphabet is just barely cheaper than the S&P 500 (25 times earnings).Alphabet is not a below-average business, and for it to trade beneath the S&P 500 is remarkable.
But other considerations go into that valuation. Alphabet is no stranger to controversy, and its ongoing antitrust lawsuit could have dire consequences for the company.However, making this case will be extremely difficult. The most likely outcome of this suit will be a fine, and Alphabet will continue its standard practices, albeit with a bit more caution.
Alphabet posted a solid quarter with many metrics moving in the right direction. But, because of one poor quarter from Google Cloud, the stock moved substantially lower. This doesn't seem like a valid reason, so I think investors are clear to add to their Alphabet stock positions.
