Investing in the future of Internet search and YouTube has rarely been so cheap.
Shares of Alphabet (GOOGL) are trading at a price-to-earnings (P/E) ratio not seen since 2012, according to data from Yahoo Finance AlphaSpace (chart below).
The move follows Alphabet’s shares falling a dramatic 12.6% Thursday after the earnings release, wiping out nearly $500 billion in market value. Shares lost another 1% in premarket trading Friday.
The sale was justified, even though Google reported strong growth in the third quarter for a company of its size.
First, Google’s search business reported revenue of $63.4 billion, lower than the expected $64.9 billion. This failure fueled fears that Google’s search empire would be eaten away by companies like Claude and ChatGPT, despite Google’s massive investments.
Second, Google reported negative free cash flow of $9.1 billion, compared to Wall Street’s estimate of negative $3.5 billion. In a market worried about negative free cash flow at Big Tech (see the reaction to Meta (META) results last week, when it also had negative free cash flow for the first time in years), this is not the number the Street wanted to see.
“Alphabet’s third-quarter results and the stock’s sharp decline show us the margin for error when a hyperscaler spends hundreds of billions building AI infrastructure and moves to negative FCF after posting disappointing results in the core,” Doug Anmuth, an analyst at JPMorgan, wrote in a note. “There wasn’t much debate: Most investors seemed to understand that Google Cloud’s strong growth, including the early rise of TPU, wouldn’t be enough to make up for a search deficit, which was telegraphed in third-party data.”
In the process, 13 Wall Street analysts reduced their price target on Alphabet.
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