Wait for the dust to settle after Alphabet's poor results before taking action on the stock

Published Tue, Oct 25 20227:47 PM EDTUpdated Tue, Oct 25 20228:53 PM EDT

Alphabet (GOOGL) reported weaker-than-anticipated third-quarter results Tuesday evening on the back of a strong U.S. dollar and a slowdown in advertising spending. The stock sank after hours. But we think Club members should wait until the dust settles before taking any action. Total revenue of $69.1 billion represented a year-over-year increase of about 6%, but missed analysts' estimates of $70.58 billion, according to Refinitiv. The strong dollar was a 5-percentage point headwind to revenue growth, meaning revenues increased 11% on a constant-currency basis, the company said. Adjusted earnings-per-share fell by more than 24% year-over-year, to $1.06 a share, well below the Wall Street consensus estimate of $1.25 a share, Refinitiv data showed. Bottom line This was a poor set of quarterly results from Alphabet, as the strong U.S. dollar and a pullback in some advertising spending resulted in one of the slowest revenue-growth rates the company has seen in years. Even Google Search, the greatest advertising platform in the world, was not immune to some macroeconomic pressures. Although Alphabet can't control how much advertisers are willing to spend, one piece of good news is management's commitment to managing expenses by driving efficiencies and moderating new headcount in 2023. This should slow the degradation of margins in this tough economic environment. Still, what management does to protect earnings won't help with the slowdown Alphabet is seeing in its business. What this likely means is that the tech giant will go through another round of downward earnings- and price target revisions over the next few days, weighing on the stock — a clear indication that investors should hold off buying up any further shares here. Alphabet's stock was down about 6.5% in after hours trading to around $97.60 a share. We lowered our price target for the Google parent to $130 a share from $160. But that still represents 33% upside. Revenue breakdown Google Advertising revenue increased 2.5% year-over-year, to $54.48 billion, missing the consensus estimate of $56.59 billion. Broadly speaking, revenue growth slowed due to difficult year-over-year comparables, as well as an additional headwind from a pullback in advertising spending. Google Search & Other revenue rose 4%, to $39.54 billion, below the $40.93 billion forecasted by analysts, driven by a solid performance in travel and retail. Tough comparables annually weighed on the growth rate, but management admitted there was a pullback in spend by some advertisers in certain segments and search ads. Financial Services is