Google's stock clobbering shows just how freaked out Wall Street is about the online ad business right now
- Google shares finished down for the second day in a row following mixed earnings.
- Even an analyst who trimmed his price target called it an "overreaction."
- One analyst said those selling Google may anticipate bad news coming from Facebook's quarterly report on Wednesday and wanted to avoid fallout to ad sector.
Google continued to feel the backlash on Tuesday of a Q1 financial report that featured some unwelcome surprises.
The share price of Google's parent company Alphabet Inc finished the regular trading session down 4.5%.
Even analysts who trimmed their price targets struggled to explain the thinking behind investors reaction.
"Unfortunately, I think a lot of people are piling on," said Scott Kessler, director of equity research at CFRA Research, who reduced his 12-month target by $50 to $1,235 a share in the wake of Google's earnings, but still has a strong-buy rating on the stock. "I definitely think it's an overreaction. It feels like a snowball effect."
Tuesday's results came amid a general market selloff that also affected some of Google's top rivals. Facebook and Amazon each fell more than 3 percent while Apple shares dipped more than 2 percent. Still, few of them suffered a decline like Google. Perhaps most significant for the digital-ad business is that Google was the first of the top companies in the sector to report Q1 results, and this isn't an encouraging start.
Google reported that first-quarter revenue increased 23% from Q1 last year, outperforming analysts expectations, but during the same period the search giant's capital expenditures nearly tripled. In addition, the company's traffic acquisition costs rose 37% and took up a greater percentage of revenue than the same quarter last year.
Clinging to Google is the possibility that new rules in Europe regarding user privacy could hurt the company's ability to collect the kind of information that advertisers want. Then, closer to home, there's the fallout from Facebook's recent troubles with Cambridge Analytica, which is accused of misappropriating user data.
The Wall Street Journal recently wrote that while Facebook faces congressional scrutiny, Google is the advertising company that possesses the most information on members of the public. Why aren't they being called on to testify before lawmakers?
Investing for growth or spending excessively?
As for Google's increased costs, Seyrafi sees discrepancies with the way Wall Street reacts to the way different tech companies invest. Google said that rising capital expenditures were due in part to the building of a global internet network, a multi-billion dollar endeavor that includes laying its own undersea cables, building data centers and buying tons of computers.
"I think what's happened is that Alphabet is investing for growth," Seyrafi told Business Insider on Tuesday. "Unlike Amazon, which is also investing, the street is not ready to accept Google's strategy as much as Amazon...but what Google is doing is prudent."
Seyrafi also suspects that Google investors might be anticipating bad news from Facebook when the social network reports first-quarter earnings on Wednesday after the bell. Any softness in Facebook's business outlook would represent more bad news for Google, given that both companies' prospects are tied to the state of the online ad market.
"I think what's happening is some investors are stepping back a bit," Seyrafi said. "Some are worried about the digital advertising model, especially post Cambridge. Some are concerned about Facebook's forward outlook and that it may not be positive, and they want to get out of Google ahead of that."
Business Insider will be covering Facebook earnings live on Wednesday after the bell.