Alphabet just had its worst day in nearly 7 years—here's what Cramer and other experts are watching now
It's not you, it's YouTube.
That's how YouTube and Google parent Alphabet explained its first-quarter revenue miss on Monday after reporting earnings, the results of which led the stock to have its worst trading day in almost seven years on Tuesday.
With shares of Alphabet closing nearly 8% lower Tuesday, experts are now eager to see how the internet giant will turn its fate around next quarter.
Here are some of their reactions:
Jim Cramer, host of CNBC's "Mad Money," said he was largely disappointed by Alphabet's report:
""[It was] one of those quarters where most companies would say, 'Look, it's a disappointment. We know we disappointed you.' It's very interesting The Wall Street Journal called it 'the poor results,' yet … you get 16% [year-over-year ad revenue growth]. ... I wish they had been more humble. I wish that they had understood the frustration of the analysts. I wish they would learn to execute better. [...] I would've started by saying, 'We did not do as well,' like [CEO] Mike Roman did at 3M. Now, you could say, 'Well, Mike Roman really blew it. Alphabet didn't.' But we all expected more. And video games? No, didn't matter. … I don't know. I finished that call and I just said, 'Really?'"
Ariel Investments' Charles Bobrinskoy forecast a potential macroeconomic pitfall for the Google parent and the rest of FANG, Cramer's long-standing acronym for the stocks of Facebook, Amazon, Netflix and Alphabet.
"I've learned not to bet against Google, but I will say you've got to watch the politics here. The one thing that [Sens.] Ted Cruz and Elizabeth Warren agree on is that these tech stocks have gotten too big and that they're using data in a way that's not great for everybody's privacy. So I am worried about regulatory risk not being factored in. [...] I think it's enforced privacy rules that give you a right to demand that a company forget you, so to speak, and that is very hard for a technology company to do and it would have a big impact on these companies' businesses. And so if the U.S. was to put in place the same kind of privacy rules we have in Europe, that would be a fundamental threat to the business model of Google and a lot of the FANG stocks."
Ali Mogharabi, equity analyst at Morningstar, was more bullish on the company's prospects:
"This pullback, and if it goes down any further, I think could create a pretty good buying opportunity. But in terms of advertising, I think it remains strong. I think one thing that we should keep in mind is that these guys have not yet fully monetized their properties. One of the main ones is Google Maps. So, you could actually see, possibly, ad revenues accelerate a little bit in about a year or two years down the road when they actually more fully monetize Google Maps. [...] There are a couple of things that they have going for them. One, on the advertising side, I still think that the pricing for video advertising is going to go up a little bit higher. It's going to help these guys down the road. And that's mainly based on YouTube. Again, they have not necessarily maximized the sales of their YouTube inventory. And then, two, there's still a lot of growth remaining for cloud, within the cloud business. Of course, they don't split it in terms of what portion of the revenues it makes up, but I think you should look for those two to possibly drive revenue growth to around 20% for the full year. One more thing I should mention is another positive, I guess, out of this report: what I notice is that tech as a percentage of revenues has actually stabilized a little bit. It's certainly lower than last year. I think it's around 22%. So, going forward, that could actually help them either maintain operating margins or possibly widen operating margins a little bit."
Aegis Capital's managing director of internet media, Victor Anthony, wanted more transparency from Alphabet:
"Going forward, particularly for the stock to be rerated higher given the results, I definitely think they should give us a little bit more clarity on cloud revenues and profits, a little more clarity on YouTube. I think that should help the [sum of the parts] valuation of the stock in the same way that [Amazon Web Services] did for Amazon. I also think it's an under-levered balance sheet. I think the company should lever up. I'm a big proponent in using leverage to drive equity returns. I think they could be a little bit more aggressive with their share buybacks. I think that's probably the most tax-efficient way to reward shareholders going forward, as well as probably stepping on the gas a little bit in terms of the Waymo rollout. I think that should help the stock given the results today."
Sarat Sethi, who is managing partner, managing director, principal and equity analyst at Douglas C. Lane, said there were other forces at play in Alphabet's stock drop:
"It's not just the earnings, it's revenue also, and I think companies that are going to produce top-line revenue growth that's better than expectations are going to get rewarded because that's really where you're going to get the operating leverage now. [...] And the reason we can talk about that is because the Fed's basically saying we're not going to go anywhere. So, with a low-interest-rate environment, you want companies that are growing top line that can actually have that leverage going forward, and I think Alphabet got punished because if revenue's coming down, expenses are going up. It's what Facebook went through about four quarters ago. So I think that could be an isolated issue, but the rest is where do we want to put our money? What sectors are going to actually have top-line growth as opposed to just kind of plodding along?"