Falling margins need to reverse course before Alphabet Inc. (NASDAQ:GOOG) stock breaks out to new highs
Technology giant Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) reported fourth-quarter numbers after the bell on Monday, Feb. 4. Although the company topped both revenue and profit estimates, Google stock dropped in response due to concerns regarding swelling costs.
Specifically, operating margins dropped to 21%. That’s the lowest operating margins have been on an adjusted and normalized basis in a long, long time.
As such, investors were spooked, and the stock dropped despite the double beat quarter. But, the drop wasn’t very significant. As of this writing, GOOG is off less than a percent on the day.
This relatively muted move in Google makes sense. Alphabet’s fourth-quarter-earnings report was some good and some bad.
On the good side, the near and long term revenue drivers remain very healthy. On the bad side, margins are falling almost everywhere, and profit growth is weak. The present valuation in Google accounts for big revenue growth and falling margins, and as such, this report should neither kill nor boost the stock.
Long term, though, the bull thesis looks compelling. It’s only a matter of time before Alphabet gets a handle on its cost structure and margin headwinds pass. When they do, margins will start to rebound.
As that happens, Alphabet will go from a sub-10% profit growth company, to a 10-20% profit growth company. That transition will ultimately push Google stock higher.
The Q4 earnings report simply signaled that this transition isn’t here yet. But, it also contained signs that such a transition could happen in 2019. As such, Google will likely remain range bound for the foreseeable future, but could break-out in later 2019 when margin headwinds reverse course.
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 1,092.89.
The projected upper bound is: 1,182.77.
The projected lower bound is: 1,050.80.
The projected closing price is: 1,116.78.
A big black candle occurred. This is bearish, as prices closed significantly lower than they opened. If the candle appears when prices are “high,” it may be the first sign of a top. If it occurs when prices are confronting an overhead resistance area (e.g., a moving average, trendline, or price resistance level), the long black candle adds credibility to the resistance. Similarly, if the candle appears as prices break below a support area, the long black candle confirms the failure of the support area.
During the past 10 bars, there have been 5 white candles and 5 black candles. During the past 50 bars, there have been 23 white candles and 27 black candles for a net of 4 black candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 84.3520. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a sell 11 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 57.13. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 78 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 100.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 7 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 4 period(s) ago.
Rex Takasugi – TD Profile
ALPHABET INC C closed down -30.760 at 1,115.230. Volume was 12% above average (neutral) and Bollinger Bands were 7% narrower than normal.
Open High Low Close Volume___
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bearish
Moving Averages: 10-period 50-period 200-period
Close: 1,100.58 1,062.38 1,117.72
Volatility: 34 40 33
Volume: 1,730,160 1,832,598 1,671,762
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
ALPHABET INC C is currently 0.2% below its 200-period moving average and is in an upward trend. Volatility is low as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of GOOG.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on GOOG.O and have had this outlook for the last 21 periods.
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