Alphabet stock faces a sharp drop after second-quarter results (NASDAQ:GOOG)

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This story was originally published to subscribers of Reading The Markets an SA Marketplace on July 22. It was updated as of the afternoon of July 25.

the alphabet (Nasdaq: Google) (Nasdaq: Google) Stocks fell sharply after that Disappointing results from Snap (Explode, Explode) On July 21, Snap sent a shockwave across social media and ad-based shares. But whether or not Alphabet has the same SNAP issues will not be known until Alphabet releases its results on Tuesday, July 26, after trading closes.

Analysts estimate that second-quarter revenue grew 14% year-over-year to $58.14 billion, while earnings increased 6% to $1.39 per share. Gross margins are expected to decline sharply in the second quarter to 62.25% from 69.98% in the second quarter of 2021.

Google Cloud is expected to see revenue rise 36.9% to $6.3 billion, while YouTube ad revenue is expected to grow 7.9% to $7.55 billion.

Investors follow an important metric for the alphabet: Traffic Acquisition Costs (TAC). This number is estimated to have increased by 12.65% to $12.3 billion. If the company reports a higher TAC number than expected, it will be viewed negatively by the market.

Analysts revised their Google ad revenue estimates from $58.3 billion recently. Although revenue estimates have fallen, they have been at the upper end of the range since mid-2021, indicating that analysts don’t expect a significant slowdown in Alphabet’s advertising business just yet, setting a high benchmark for the company to outperform.

google . chart

Bloomberg

Revenue and profit estimates have also not been significantly revised. So, if there are external pressures from poor ad sales, it won’t be reflected in earnings or revenue estimates, which means Alphabet has to advance this quarter and beat those high expectations.

Google Chart

Bloomberg

Is Google stock cheap or not?

However, something seems to be off for the stock currently, as it has been very weak and appears to be very cheap, trading at only 16.6 times the next twelve-month earnings estimates and trading at the very low end of its historical range. Even when adjusted for the expected long-term growth rate, the price-return-growth (PEG) ratio is only 0.70, well below 1, while the price-to-sales ratio is around 5.5. Both are at the lower end of their historical ranges and seem cheap.

This presents two options for investors: the stock is incredibly cheap, or the market fears that future earnings and revenue expectations are too high and will need less adjustment.

Google stock

Bloomberg

– Falling stock betting

At least one trader believes or fears the company will report disappointing results on Tuesday, or thinks the growth outlook is too high. On July 22, open interest on September 16 rose to $95 by 13,752 contracts. The data shows that shorts were bought at $1.19 per contract on ASK. This means that the stock is trading below $93.81 at expiration. It doesn’t sound like a big bet, but the trader paid a premium of about $1.6 million to create a bearish position, which is a big bet.

Weak Momentum in Alphabet Stock

Alphabet technical chart is very weak, with a long term downtrend on the RSI. In addition, the shares have been consolidating sideways since the beginning of May, between $100 and $120. This sideways consolidation formed after the stock suffered a significant drop. This results in what appears to be a technical pattern known as a bear pennant which could cause the stocks to drop significantly. The support level to watch on the downside move will come in at $100. If that price folded, that would open a path for the stock to fall to around $89.

Alphabet stock momentum

Trading View

Alphabet has been an impressive growth story over the past several years and has a bright future in the long run, given its dominant position in search and advertising and its growing dominance in streaming services. However, that doesn’t mean the company isn’t prone to getting hit by a rough patch once in a while. The arrow might be entering one of those rough patches at the moment.

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