Alphabet Q4 earnings miss view on $586 million charge

The parent company of Google, Alphabet (NASDAQ: GOOG), reported fiscal 2016 fourth-quarter earnings that missed analysts’ estimates by a margin of 28 cents. Following the results, investors sold their positions in the stock.

Since Friday, the stock has lost about $25 to trade at $802 levels. However, a look at the reason for the company to miss earnings will reveal that it is because of a one-time charge, and measures have already been taken to avoid such an incident from happening again. So, based on the details provided underneath, we anticipate the share price to recover and remain bullish in the short-term.

The California-based number one search engine provider reported a 22% rise in the fiscal 2016 fourth-quarter revenues to $26.064 billion, from $21.33 billion in the similar period last year. The Q4-2016 GAAP net income jumped to $5.33 billion, or $7.56 per share, from $4.923 billion, or $7.06 per share, in Q4-2015.

Bloomberg Technology

Excluding charges, the fiscal 2016 fourth-quarter non-GAAP net income climbed to $6.59 billion, or $9.36 per share, from $6.04 billion, or $8.67 per share, in the corresponding quarter of fiscal 2015. The Wall Street analysts had expected earnings of $9.64 per share on revenues of $25.26 billion for the quarter ended December 2016.

The reason for lower than expected earnings was a $586 million charge related to the stock-based compensation made by Alphabet. In the fourth-quarter last year, the company took a charge of $316 million for the stock-based compensation. The charge was based on a recent rule change that penalized companies which were using stock-based compensation to hike their adjusted earnings numbers.

To avoid a similar scenario in the future, the company’s CFO Ruth Porat stated that from this quarter onwards, the company will include stock-based compensation in the non-GAAP earnings. Notably, Microsoft, Netflix, and Intel have already implemented a similar change to their accounting practices.

On a per share basis, the $586 million charge translates to $0.83. In case, the company had implemented the change in the accounting practices earlier, then Alphabet would have easily surpassed analysts’ earnings estimates. Porat is optimistic that the revenue from hardware, cloud, and YouTube subscriptions would add up to a considerable amount in the future. The company has also initiated cost cutting measures in its high-risk ventures. Thus, considering the above facts, we expect the stock of Alphabet to turn bullish soon.

Technically, yesterday’s closing price of $802.4- was near the major psychological support level of 800. Furthermore, an oversold scenario is indicated by the Williams %R indicator. So, we can anticipate a dead cat bounce in the stock price.

A trader should purchase a high or above contract to gain from the probable uptrend in the stock price. The equivalent of a call option can be purchased from a binary broker’s trading platform when the underlying stock trades below $820 in the equity market. The suggested contract should remain valid for a period of seven days from the time of investment.