Google parent’s share price tanks but is reaction to earnings results overdone?

Last week was a lousy one for Google parent Alphabet, which tanked 9.5 per cent after reporting earnings. It was worst one-day share price hit since March 2020.

While Google’s overall report appeared healthy, with the company surpassing revenue and earnings expectations, investors were spooked by slower-than-expected growth in its cloud computing division.

Cloud revenues grew 22 per cent – short of analyst estimates (26 per cent), and the slowest quarterly growth rate since Google’s cloud results were first separated in 2019.

Bullish analysts see the sell-off as overdone, noting that Google’s cloud segment accounts for only 11 per cent of revenues and pointing out that Google’s main business – advertising – exceeded expectations.

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It’s also worth noting that Alphabet shares sold off earlier this year after Google’s AI-powered chatbot gave the wrong answer in a promotional video, only to subsequently soar after investors changed their minds on Google’s AI progress.

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Still, a necessary ramping of AI spend, coupled with what Google chief executive Sundar Pichai called “optimisation efforts” from cost-conscious customers, may pressure profit margins in coming quarters.

Besides, Google had no room for error coming into earnings. Even after the sell-off, shares are up some 40 per cent this year. Investors and analysts can’t be blamed for focusing on downside risks.