Alphabet is the IBD Stock of the Day as the Google parent posted a fourth-quarter earnings beat and announced a 20-for-1 stock split. Shares gapped up on the news, clearing a buy point before retreating. After the sharp gain, it's possible that a handle may form.
Alphabet reported fourth-quarter earnings after the market close on Tuesday. Google stock is now in the black in 2022 after pulling back in early January amid volatility in the Nasdaq. Its relative strength line is at a new high.
Google stock gapped up 10% on Wednesday — reaching 3,030.93 at one point — before retreating to 2,960 at the close for a gain of 7.5%. Heading into the earnings report, Google stock had an entry point of 3,019.43.
The price-to-earnings ratio of Google isn't that high — especially when compared to more-speculative growth stocks. That's a plus with Treasury yields around two-year highs and the Federal Reserve about to tighten monetary policy significantly.
Google Stock: 20-For-1 Stock Split Coming
A coming change in Alphabet's institutional ownership is something to watch amid the 20-for-1 stock split, which should benefit retail investors.
Google stock owns an Accumulation/Distribution Rating of C+. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
The 20-for-1 stock split takes effect after the close of business July 15, if shareholders approve. The stock split could pave the way for the tech giant to enter the Dow Jones Industrial Average.
Google stock holds an IBD Composite Rating of 97 out of a best possible 99, according to IBD Stock Checkup. IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
Google earnings under generally accepted accounting principles, also known as GAAP, jumped 38% to $30.69 per share, including a $2.84 per-share gain in equity investments. Analysts predicted Google earnings of $27.68 per share. Depending on how the Nasdaq fares in 2022, Google's gains on equity investments might reverse, said a recent UBS report.
Tough Year-Over-Year Comparisons
Net revenue — minus traffic acquisition costs — came in at $61.9 billion vs. estimates of $59.25 billion. Traffic acquisition costs jumped 28% to $13.43 billion.
Also, gross revenue rose 32% to $75.33 billion. Analysts had estimated gross revenue of $72.3 billion.
One issue that Google stock faces is tough year-over-year comparisons in 2022, especially in the back half of the year.
"We expect smaller beats in 2022 as search growth slows and operating expenses increase," Bank of America analyst Justin Post said in a note to clients.
He added, "However, versus peers, Alphabet has more earnings stability, more potential exposure to an ongoing rebound in local and travel verticals, evidence of artificial intelligence advantages across the product stack and a management team doing more for shareholders (buybacks and now stock splits)."
Google Stock Repurchases Rise
The company repurchased $13.5 billion of Google stock in the fourth quarter, up from $12.6 billion in the September quarter.
Internet search and other revenue rose 36% to $43.3 billion vs. estimates of $40.95 billion. Google said cloud-computing revenue rose more than 45% to $5.54 billion vs. estimates of $5.57 billion. Google cloud cut its operating loss to $890 million, missing estimates of a lower $758 million loss.
Meanwhile, YouTube advertising revenue rose 25% to $8.63 billion. Analysts had estimated YouTube ad revenue of $8.81 billion.
Alphabet expects a "meaningful increase" in 2022 capital spending, reflecting investments in computer servers in internet data centers and construction of office space in New York and London.
Google stock analyst Brian Nowak of Morgan Stanley in a recent note said Alphabet's hiring boomed in the fourth quarter.
"GOOGL's 6,500 new employees added in Q4 was a new quarterly record (since 2012) and 50% higher than expected, as GOOGL hires and invests in its growth initiatives," Nowak wrote. He went on to say, "With top-line trends intact, we think the next near-term investor debate will remain around GOOGL's level of investment and margins in 2022 and 2023."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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