Shares in Google's parent company, Alphabet, tumbled after reporting third-quarter results in October. The drop surprised many investors because, until then, Alphabet was a top-performing stock this year because of interest in its artificial intelligence solutions.
One of the few people who wasn't caught off guard by Google's sell-off was Real Money Pro analyst Bruce Kamich.
Hours before Alphabet reported disappointing quarterly financials, causing its stock to drop nearly 10%, Kamich wrote that investors should "approach Alphabet with caution" because his analysis suggested a risk of a downward correction.
Given his correct prediction, investors may want to pay attention to what Kamich thinks could happen next to Google's stock.
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Google enjoys tailwinds from AI investments
Last year's successful launch of ChatGPT uncorked widespread interest from companies and governments interested in training and implementing artificial intelligence solutions.
The potential for ChatGPT to shake up how people consume information quickly led to Microsoft cutting a deal with OpenAI to incorporate it into its Bing search engine.
Related: Google targets Microsoft, ChatGPT with huge new product launch
The risk that generative AI applications like ChatGPT could disrupt traditional search, upending Google's long-standing dominance, wasn't lost on Alphabet. The company quickly rolled out its generative AI, Bard, and promised additional investments designed to keep others at bay.
Alphabet didn't stop there. They also accelerated efforts to make AI tools available to Google Cloud customers, including some of the world's largest companies, who use Google's network to store and access data from anywhere.
These decisions helped shore up confidence among Google investors, who correctly bet that increasing demand tied to customers' own AI initiatives would provide a tailwind to Alphabet's top and bottom lines.
Alphabet's year-over-year revenue growth over the past four quarters was 1%, 3%, 7%, and 11%, and its earnings per share have changed by -19%, -11%, 17%, and 42%.
Given the company's improving growth rate, Alphabet's business is humming along nicely. Nevertheless, investors were still disappointed by Alphabet's latest figures because they expected even better results.
Specifically, Wall Street was modeling for Google Cloud revenue of $8.64 billion. Instead, the company delivered $8.41 billion. While that doesn't seem like a big miss, it was enough to raise alarms among some who worried it meant Microsoft's Azure and Amazon's AWS were out-competing it.
Google's price chart reveals a new target
The concerns took a toll on Google's share price. In early October, Alphabet was trading above $141. However, following its third-quarter earnings conference call, shares could be bought on Oct. 27 for about $120.
Alphabet's stock has since rebounded alongside the broader stock market rally this past month, but its share price has yet to eclipse those early October highs.
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The company's action once again caught the eyes of Kamich, a technician who has analyzed price charts professionally for over 50 years. His concerns about Alphabet in October resulted from his analysis of Google's stock price, volume, and momentum.
On Dec. 12, Kamich reviewed Alphabet's daily and weekly price chart for insight into what could happen to its shares next. He also calculated a new price target using a daily and weekly point-and-figure chart. Unfortunately, Kamich came away unimpressed.
"Prices have been rolling over the past four months marking what I would call a rounded top," wrote Kamich. "The On-Balance-Volume (OBV) line has been moving sideways since early September. The Moving Average Convergence Divergence (MACD) oscillator has been weakening since June and is now back to the zero line."
On-balance-volume (OBV) is essentially up minus down day volume, while the moving average convergence divergence (MACD) oscillator is a momentum indicator.
For Kamich to expect Alphabet shares to rally, he'd want to see decidedly greater up-day than down-day volume and positive momentum.
His point-and-figure price targets aren't encouraging either, given they suggest shares could retreat to $103. Point-and-figure charts don't predict how long it will take for a stock to reach a price target, and they're not guaranteed. Still, the downside target isn't bullish.
"Traders should reduce their exposure to GOOGL and weakness below $128 could precipitate faster declines," concluded Kamich.
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