Alphabet (GOOG, GOOGL) is trading 9% lower after the company missed first quarter estimates last night.
Revenue growth of 17% was the slowest in four years. What's more, Google's parent company missed revenue estimates by nearly 3%, the largest miss since 2012.
CFO Ruth Porat cited foreign exchange headwinds of 2% and tough comparisons from the timing of product changes last year. US revenue was up 17% and EMEA revenue was up 16% excluding the foreign exchange headwind. Paid clicks growth decelerated to 39% from 66% in the fourth quarter.
On the call, analysts questioned whether there were any demand or go to market (sales execution) issues. Management said no -- the company remains well positioned.
Encouragingly, traffic acquisition costs (TAC) as a percentage of revenue fell 200 bps yr/yr to 22%. However, the operating margin fell 200 basis points to 23% excluding a $1.7 bln fine from the European Commission for anti-competitive practices, or 700 bps to 18% including that fine. Operating expense grew 20% excluding the fine due to data center build-outs, headcount growth for its cloud business and higher content costs at YouTube.
As a result, earnings of $9.50/share including the $1.7 bln fine from the European regulators missed estimates.
Looking forward, management reiterated cap-ex growth will slow this year but warned about higher sales and marketing expense in the second quarter.
Stepping back, these results were especially disappointing considering the stock closed at an all-time high yesterday.
A slowdown in the company's core advertising business is stoking fears of increased competition from the likes of Amazon (AMZN). The digital advertising market is hyper competitive. That said, high-teens growth is not terrible at a greater than $100 bln run-rate.
Google remains the dominant backbone of the internet. Google search market share remains above 90% while web browser Chrome's market share remains above 60%. What's more, Android is the dominant mobile operating system globally and YouTube is similarly dominant in online video. The Google Cloud Platform is a distant third but Waymo is said to have a lead in autonomous driving, which may transform the transportation market longer term.
Still, opacity from management does not provide any solace for investors.
Fortunately, Google has some valuation support. The stock trades at ~25x EPS and 12x EV/EBITDA, which is comparable to Facebook (FB).
The stock is below its 50-day moving average for the first time since January this morning.