Alphabet Inc (NASDAQ:GOOG) stock is having an unusually sharp decline since last week. Many are worried that this might spark a trend reversal. But if you choose to walk away from Google stock right now, you could be missing a big opportunity.
Here’s What the Bears Missed About Google Stock
If you are the behemoth in your industry, there is one thing that you absolutely cannot do—miss earnings estimates. Unfortunately, that’s exactly what Google’s parent company did last week.
Alphabet reported first-quarter earnings after the closing bell on Thursday, April 21. Revenue came in at $20.26 billion, slightly below Wall Street’s expectation of $20.37 billion. The company generated $7.50 in adjusted earnings per share (EPS), which also missed analysts’ estimate of $7.97 in adjusted EPS. (Source: “Alphabet Announces First Quarter 2016 Results,” Alphabet Inc, April 21, 2016.)
As you would expect, when the company does the absolute unthinkable—no matter how ridiculous this sounds—the market punishes the stock. Since its earnings release, Google stock has plunged 8.9%.
The thing is, if you look beyond what Wall Street analysts were expecting, the company actually did a tremendous job.
In the reporting quarter, Alphabet’s revenue surged 17% year-over-year. Excluding the impact from exchange rate fluctuations, revenue growth would have been a more impressive 23%. Note that in the first quarter, the company’s revenue growth rate was also higher than the year-ago period.
At the same time, Alphabet is running more efficiently. The company expanded its non-GAAP operating margin by 100 basis points to 35%. Its operating expenses as a percentage of revenue have been reduced by 100 basis points to 36%.
Thanks to efficient operations, top-line growth trickled down to the bottom line. In the first quarter, Alphabet’s adjusted net income increased to $5.2 billion. Translating to earnings of $7.50 per share, Google stock’s EPS is 16% higher year-over-year.
The best part is that the company’s “Other Bets” segment is booming. Separated from Alphabet’s core business, Other Bets comprises “Google Fiber,” “Nest,” “Google Life Sciences,” “Google X,” and other moonshot projects. In the reporting quarter, revenue from Other Bets more than doubled to $166 million.
Google Stock to Recover Soon?
So, we know that the company is more than solid. But when will Google stock go back to its steady growth path?
Well, looking at the technical data, there are mixed signals.
Chart courtesy of www.StockCharts.com
In the past several trading sessions, Google stock has been beaten down to a very critical level: its 200-day moving average (MA). Note that since Google stock broke above this indicator last July, it has been mostly trending upward. There were several pullbacks along the way, but the stock never touched its 200-day MA—until now.
The 200-day MA could become a support level for GOOG stock. But if the stock crosses below it for an extended period of time, it could mean that the uptrend is reversing.
On the flip side, there is the relative strength index (RSI). Based on the closing prices of a recent trading period, RSI can be used to determine whether the stock is overbought or oversold.
The index ranges from zero to 100. When a stock’s RSI is approaching 70, it’s considered overbought; when the RSI approaches 30, the stock is considered oversold. Right now, Google stock has a 14-day RSI of just above 33, indicating that the stock is deep in the oversold territory.
As we have seen in the past, the RSI can’t stay low forever. When sentiment starts to change, the oversold Google stock could see a short squeeze.
The Bottom Line on Google Stock
With its recent downturn, Google stock has lost some of its upward momentum. But given the company’s unrivalled competitiveness in its field, future profitable projects, and a reasonable valuation, it wouldn’t take long before GOOG stock goes back to its upward trend.