Alphabet Inc. (GOOGL) stock is trading lower by more than 3% in Tuesday's pre-market after the internet giant missed fourth quarter 2019 revenue estimates by less than 2%. Investors chose to ignore earnings per share (EPS) results that far exceeded expectations, instead focusing on 17.3% year-over-year revenue growth that looks outstanding at first glance. The unusually harsh sell-the-news reaction suggests that the stock was priced for perfection after a four-month 27% rally to an all-time high near $1,500.
The big tech superstar released YouTube ad income numbers for the first time, reporting a 31% year-over-year increase to $4.7 billion. That division's advertising is now adding about $15 billion in annual revenue, marking a significant portion of total company revenues. Meanwhile, the jury is still out on Wall Street's opinion of Alphabet's fourth quarter, with neither upgrades nor downgrades at the time of publication.
Growing headwinds could forestall a rapid recovery, exposing the stock to even lower price levels before attracting committed buying interest. The coronavirus is threatening to reduce worldwide GDP in the first quarter, which would likely translate into lower ad revenues. In addition, anti-trust investigations could take their toll, with the company's massive footprint getting the unwelcome attention of Washington D.C. and Democratic presidential candidates.
GOOGL Long-Term Chart (2004 – 2020)
A 2004 initial public offering (IPO) attracted broad-based interest, lifting the newly minted stock from $50 into the 2007 high at $373.52. It lost two-thirds of its value during the 2008 economic collapse, bottoming out at a three-year low in the $120s, ahead of a recovery wave that stalled about 50 points under the prior high in 2009. Breakout attempts failed in 2010 and 2011, while a buying surge in the second half of 2012 finally completed the round trip.
A 2013 breakout caught fire, lifting the stock above $800 in the second quarter of 2014. That level marked the first point in a rising wedge pattern that guided price action into early 2018, when a buying spike cleared wedge resistance. However, the uptrend lost momentum following the initial surge, yielding a broad rectangular pattern with resistance under $1,300 and support near $1,000. The stock broke out once again in the fourth quarter of 2019, lifting into January 2020's all-time high at $1,500.
The monthly stochastic oscillator has entered the overbought zone for the first time since 2017, but it isn't situated at an extreme level. In addition, the trendline of rising highs (red line) since 2015 is located about 200 points above the current price, indicating that bulls could come to the rescue in the coming weeks and lift the stock to new highs. Even so, the reward:risk profile has shifted against new positions, suggesting that sidelined investors keep their powder dry for now.
GOOGL Short-Term Chart (2016 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator topped out well before price in March 2018 and eased into a sideways pattern that denotes a balance between bulls and bears. It turned sharply lower in the second half of the year, coming to rest at the August 2017 low in January 2019. Two major buying impulses reached 2018 resistance in January 2020, several months after the stock broke out to a new high, setting off a bearish divergence that is coming into play in Tuesday's session.
The 50-day exponential moving average (EMA) near $1,400 marks a high-odds downside target, but a continued decline into the 200-day EMA and breakout support near $1,300 would mark a lower-risk buying opportunity, especially if it isn't reached for another one to three months. Investors could be rewarded for their patience at that time with a strong recovery wave that clears the prior high and targets the rising highs trendline.
The Bottom Line
Alphabet stock may have entered an intermediate correction that drops the shares into moving average support at $1,400 or $1,300.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.