Alphabet’s 8% Drop Might Be the Entry Opportunity of the Year

Key Points

• Alphabet shares gained over 30% last year, with an 8% pullback creating a buying opportunity.
• Recent earnings showed a 28% net income jump and 31% EPS growth.
• Despite spending concerns, analysts remain bullish with strong price targets.

Alphabet Inc NASDAQ: GOOGL, the parent company of tech giant Google, has been on a remarkable upward trajectory over the past year, with its stock climbing as much as 40%. However, yesterday’s 8% dip following the latest earnings report has caught the attention of savvy investors. 

With the stock still up 30% from the same time last year, this pullback, driven by concerns over cloud revenue growth and increased capital expenditures, might just be the golden entry point many have been waiting for. As we’ll see below, there are several reasons for investors on the sidelines to be excited. Let’s jump in and take a look.

Fundamental Performance

To start with, let’s break down Alphabet’s latest earnings report from Tuesday. While it was a solid update overall, a small revenue miss took the spotlight. Despite consistently surpassing analyst expectations throughout 2024, revenue came in $170 million below consensus this time - a rare stumble that weighed on the stock. However, beyond that slight disappointment, there were plenty of bright spots worth paying attention to.

Net income, for example, jumped 28%, which helped push Alphabet’s EPS up 31% year on year, while free cash flow remained strong at nearly $25 billion for the quarter. Most importantly, search and ads continued to grow in the face of rival search options like ChatGPT.

This would have been a key metric that Wall Street was watching closely, and so its latest performance would have been well received. On the whole, aside from the revenue miss, the impressive figures served to highlight Alphabet’s resilience and adaptability in a competitive landscape.

Bullish Analyst Updates

For those investors who love to grab a bargain, the multiple bullish stances from analysts covering Alphabet stock suggest this recent dip is indeed more of a speed bump than a roadblock. Consider that just last week, the teams at both Wedbush and Oppenheimer reiterated their Outperform ratings, along with $220 and $225 price targets, respectively.

From where Alphabet shares closed on Wednesday, that’s pointing to a targeted upside of almost 20%. Needless to say, this would also result in shares being back trading at all-time highs.  

Their bullish outlook was echoed yesterday when, in a note to clients, Pivotal Research expressed confidence in Alphabet’s post-earnings valuation, emphasizing the strength of its assets. They acknowledged the need for patience as management continues to deliver in search and YouTube and address the deceleration in cloud growth, but they still reiterated their Outperform rating and $225 price target. 

Potential Concerns

Of course, a surprise revenue miss is never a good thing, and concerns were flagged on how the last quarter saw some hefty expenditure from the company, which raised eyebrows. When considering how Alphabet posted a quarter-on-quarter decline in cloud revenue and investors looking at the rapid advances (at minimal costs) from China-based AI startup DeepSeek, a big capital-spending surprise isn’t likely to sit well.

In that context, yesterday’s drop is somewhat understandable, and it will be concerning if Alphabet can’t show some payoff soon. Investors should keep a close eye on how these investments translate into tangible returns in the coming quarters while at the same time recognizing that it’s fair to think yesterday’s drop might mean it’s all priced in now already. 

Getting Involved

Alphabet’s current technical setup also supports the theory that this is an enticing opportunity for those of us looking to add some tech to our portfolios. The stock bounced off a level of support yesterday and closed well above the lows. This has created a strong, potentially only a short-term, foundation to launch a comeback rally in the coming days. 

In addition, an RSI of 46 indicates that Alphabet stock has a ton of room to run if things start taking off. Remember, the S&P 500 is still up around highs, a risk-on sentiment still prevails, and Alphabet is still Alphabet. It’s not often that it drops 8% in a single day, so it could well be the time to be brave.