Is Alphabet Stock a Buy After Its Post-Earnings Drop?
Most of the earnings decline came from investment losses. Is the cash flow a bigger worry?
Alphabet (GOOGL, GOOG) shares fell around 10% in after-hours trading on October 28 after the company released its Q3 results. Despite a 25% year-over-year revenue growth to $127.6 billion, and a more than doubled Google Cloud revenue of $30.7 billion, two factors contributed to the stock's decline: earnings per share dropped to $2.12 from $2.87, and free cash flow turned negative for the second consecutive quarter due to increased capital spending to $51.4 billion.
The stock is currently trading near $293, down about 27% from its May 13 record close of $402.62. The earnings decline might appear more significant than it is, with a substantial portion of the drop stemming from gains and losses on investments. Excluding these investment swings, earnings per share grew 22% year-over-year. Operating income climbed 30% to $40.6 billion, with Google Cloud's revenue increasing 103% year-over-year and operating income tripling to $11.1 billion.
Despite the company's heavy investment in AI, Google Cloud is generating significant profits, with operating margins dropping but still above the 33.9% level reported a year ago. While the company is borrowing and selling shares to cover the cash flow gap, the revenue growth and Google Cloud's performance suggest the stock may still be reasonably priced at around 19 times expected 2027 earnings.
Written by urgent.news from Motley Fool's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
