📉 Why Google Stock Is Selling Off

Google stock is selling off after earnings, down over 6% on the day. Alphabet reported $911 per share in earnings, making it look like a gigantic beat, up 217% above expectations. That would have made it look like Google's earnings per share were up massively year-over-year. Historically high growth. But the reality is roughly 70% of that net income or gap earnings per share in the quarter was primarily tied to investment gains in SpaceX and Anthropic. That boosted their quarterly net income to $112 billion. They had that same effect last quarter with their earnings as well. These investment gains and losses are something similar to what you would see over at a company like Berkshire Hathaway that has a large pool of public investments, but it's not truly reflective of the actual cash Google's business generated in the quarter. If we strip out those investment gains, Google's earnings were much closer to just under $3 per share. And that number is much closer in line with analysts expectations for Alphabet growth and their recent performance last year. But the more important number here with Google and why it's selling off is buried in its cash flow statement. Google generated 5.86 billion of free cash flow in the quarter. That's right, negative. And that's the first negative quarter of free cash flow going back all the way to 2006 for Google. Now, to be fair, Google did generate $ 39.07 billion of operating cash flow in the quarter, which was up 40% year-over-year. So, the company is growing their cash generated from their actual core business, and it's growing very fast for a large company. And you can see over the trailing 12 months, they've generated $185.6 billion in operating cash flow. Again, up nearly 40% year-over-year. So, the company is making more money than ever. But the problem is they're spending more money than ever as well. Or depending whether you're a bear or a bull, they are investing that money maybe. In the latest quarter, Google had $44.9 billion in capital expenditures, and this is funding their AI data center buildout. That capex is up 100% year-over-year for the quarter. They've spent $132 billion over the trailing 12 months. This is historically high for the company, which previously had a capital light business model, especially for their core Google search business. Now, they did boost capex over time to fund Google Cloud, which is a great hypers scale data center business. And this new capex spending is supercharging that side of the business while also allowing them to develop the cutting edge models that they have now with Google DeepMind and run the actual implementation of these models with AI inference across all of their Google applications in the Google suite and of course Google search. And they need a lot of compute for all of that. And if you think this is a lot, Google's management just said in the latest earnings call that they are expecting 195 to 205 billion of annual capital expenditures going forward. And they said it may be even more in 2027. So is the market wrong to be worried about all of this capital expenditures at Google? Today I'll provide my thoughts on whether this 6 12 7% selloff is a buying opportunity for Google stock. But Google isn't the only company selling off after earnings. I'll look at two other examples, including Tesla, which sold off nearly 15%. Plus, a dividend growth stock, which some of you in the comments wanted me to cover, Rollins, ticker symbol R. They sold off 10% after earnings. So, with that said, let's roll the intro and get into today's stock analysis video. >> [music] >> The following reflects the opinions of a man who spends far too much time thinking about stocks. Please do your own research before making any investment decisions. Nothing in this video is personal financial advice. Continue at your own risk. My name is Zach. This is Dividend Data and you should leave a like and subscribe to the channel if you enjoy the video. And throughout I'm going to be using the next generation version of dividend.com which just launched earlier this week. This is the best platform to research stocks and track your investments. You can try it out for free with the link in the description and pin comment of the video. You can also get the complete version of this tool with all of our pro features if you sign up for our paid plan. And to celebrate the launch, we have a founding member deal where you can get 50% off annual membership. And you can lock in that discount price for life. 30-day money back guarantee. No risk in trying out. The link is in the description and pin comment of the video. So, let's start with Google, which is definitely driving the broader market down on the day. As you can see, the S&P 500's down 1.33%, NASDAQ composits down 2.23%. to 3%. And Alphabet, it's the third largest company in the world at a valuation of $3.86 trillion. So, it can definitely move the market, especially if it's down 6.6% on the day. So, first, let's just cover some highlights from their latest earnings report. Overall, Alphabet's revenue is up 24% year-over-year. Google Search revenue was up 17% year-over-year. And keep in mind, a couple years ago, people were saying that Google Search was dead because of AI. And since then they've actually accelerated their topline revenue growth. So their most profitable cash cow that they use to fund all of their business operations pretty much it's growing and there's no signs that AI is actually killing that business right now. The fastest growing part of Google is Google Cloud and this is quickly becoming their second largest part of the business and over the long run it's going to be a large cash generator for them as well. Google Cloud revenue is up 82% year-over-year. Now this is the third largest hypers scale cloud company behind Amazon and Microsoft Azure and they are seeing a massive acceleration in revenue growth in terms of growth right now it's Google cloud number one by a lot followed by Microsoft Azure which also has fantastic growth and then Amazon Web Services is starting to accelerate recently so huge growth at Google Cloud and they have a $514 billion cloud backlog so that's revenue they have booked as long as they can deliver And hint hint, that's part of the reason why they're investing so much in capex. They need to build out these AI data centers. In their first party AI models, they generate 22 billion tokens per minute. That's up from 16 billion tokens in the prior quarter. So, usage of Google's AI models is growing rapidly. YouTube, one of the best businesses in the world. I think it's the best media asset you could own in the world. I may be biased because I'm a YouTuber. I post videos on YouTube. Their revenue is up 13% year-over-year. and the Gemini app which is Google's AI app their version of chatbt or claude that has 950 million monthly active users and that goes to show the power of Google's distribution they own Android with all of the Google phones Google search it's massive all the Google apps and applications their whole work suite you know whether it's docs whether it's Gmail whether it's Google sheets distribution still matters a ton and I'll explain briefly how they break up their business so they have Google services that includes Google Search, YouTube Ads, Google Network, and their subscription platforms, Google Search is their largest revenue by far in that segment, and it's also nearly pure profit margins. So, while they're diversifying a bunch, this is still the cash cow. So, you can see their overall revenue is up 15% year-over-year in that business segment. And their subscriptions are growing pretty well now at $ 122.9 billion of quarterly revenue, up 15% year-over-year. And you can see the overall operating income in the segment. This is their big profit driver. It came in at $39.5 billion in the quarter, up from $33 billion in the year prior. But then, as I mentioned, they have a second pillar forming at Google. Now, it's been forming for many years. That's long-term planning for you. And that's Google Cloud. Google Cloud revenue for the quarter came in at $ 24.7 billion, up from 13.6 billion the year prior. and their growth accelerated from 32% year-over-year to 82% year-over-year. And this is why they're investing so much money. And this is actually becoming a profitable part of their business. Around a year and a half ago, they had their first profitable quarter for Google Cloud. And last year, this quarter was $2.8 billion of operating income. This quarter, $8.8 billion of operating income. And their operating margin is expanding. It's becoming more profitable. Now, yes, there still is the capital expenditures part of that, but a lot of that isn't to replace their current business that is operating right now in Google Cloud. It's to build future capacity and bring in next generation hardware to serve that increased demand. This is not one of those businesses like AT&T as an example where they have to build out 5G and spend tens of billions of dollars, but it doesn't necessarily increase their amount of revenue they can generate or the amount of customers they can serve. With Google Cloud and a lot of these hypers scale companies, if they spend the capex, the demand is there and their businesses will grow. So, that will help you understand Google's business and their recent performance in Q2. But let's dive a little bit more into that capex spending and then talk about whether or not Google's a good buy at today's price. So, first in the big picture, Google's a growing business. $445 billion of trailing 12 months revenue up 20% year-over-year. And the company is building an incredibly strong balance sheet. $921 billion in total assets with $281 billion of liabilities. So, they have shareholder equity of $640 billion. They have tons of cash on hand, which is why they're so prepared to invest. In fact, they recently raised debt and they've had decades of having a high cash flow business. So, this is really their moment and their opportunity where they think this is a great time to deploy capital. Now, interestingly, for a long time, the company didn't pay dividends. They did do some share buybacks though and they were repurchasing shares from 2019 through last year, but they've basically now stopped repurchasing shares and all of their focus is on spending money to build out these AI data centers. But interestingly, they started paying out a dividend 2 years ago. Now, to be fair, it's a very low payout ratio. We're talking 10%. So, the company can still afford to pay this even with their lowered free cash flow. And they've been raising the dividend payment about 4% annually. The whole story with Google though is growing their operating cash flow and they seem to be doing that. Now the capex as I mentioned earlier it's growing at an insane rate and in the recent quarter their capex spending outpaced their free cash flow. However over the trailing 12 months the company is still free cash flow positive and actually significantly so. Now it's down 20% year-over-year, but they generated $53.2 billion of free cash flow over the trailing 12 months. And if you're wondering why I was zoomed in there, I switched now to the zero yaxis. So you can see it's still very profitable. However, in the latest quarter, it hit neg5 billion. And that's because they had their highest capex ever in one of their lowest earning quarters. If we go back to 2025, 2025 was their weakest quarter of the year. So Q2 proves to be their weakest quarter. Now, they saw 40% year-over-year growth in this Q2, but it's still the lowest quarter. So, if you're looking at Google stock, I would say that next quarter, if it has 40% year-over-year growth as well, they will be far ahead of their capex, even if they raise it another 15 billion. So, yes, this quarter Google's free cash flow is negative. But I think longer term, their business is still growing and I think even if they increase capex, they can definitely remain positive free cash flow and it really just depends on how aggressive they want to be. The big picture is that Google is financially still in a fantastic position, one of the best businesses in the world. They have a dominant position in AI. I don't even have the time to go into how they're a full stack AI company. Today, we're focusing more on the financials and stock analysis side of it, but overall, I would not be worried about any fundamental side of Google's business. But is it a good time to buy right now? That's a question. And to that, I don't have a definitive yes at the current price. So, after selling off nearly 7% today, Google is up 1.35% on the year. That's a year to date. And it's up 67.9% over the past year. So, overall, the company is still up pretty big in terms of stock price. And when you compare Google to some of its peers, it doesn't necessarily signal that it's a screaming buy. And that's why I'm saying you don't need to rush in to buy more Google right now. As an example, if we look at a company like Microsoft, it's pretty much the same exact conditions with the free cash flow being lower because they're spending so much on AI data centers. The market's been putting a curtain to Microsoft. And I don't necessarily think that's going to switch up in the short term. The same is true with Meta. I think over the next few months, I don't think that's going to switch up. The market has been punishing all of the companies spending the capex and been rewarding the companies who are generating tons of free cash flow like these memory companies, Micron, a lot of the semiconductor companies. In general, Nvidia, although I would argue Nvidia is actually looking a little undervalued right now in the market. So, if we go back to Google, I agree long-term they're going to have tons of growth and this is going to be a company you want to hold on to, you want to own long term. dollar cost average into over time. And if you're in that camp, a 7% sell off like today could be a decent opportunity to add to the position, but I wouldn't rush into going heavy right now. Google's not necessarily a deep discount at the moment, but this company will keep growing well into the future. Analyst expectations are in 2030 they'll have $2426 in annual earnings per share, which at today's price would be a 13.2 P ratio. If you assume they trade at 22p ratio at that time, then that would imply a stock price in 2030 of $540, which would be up 69.4% from here or 12.6% annually. And I'll give you another look here. This is called the value graph on dividend data.com. And this EPS version, it's based on that GAP earnings per share, but I already mentioned the problem with Google's gap earnings per share. It has those SpaceX and anthropic gains and longer term those could switch into losses and in general yes that's good for Google's balance sheet that these companies are worth more but it's not reflective of the cash generation of Google's business. So I would like to flip over to free cash flow and operating cash flow and that will give you better context of whether or not Google is a good buy right now. So what we're doing here is we're comparing to the historic multiple that Google has traded at over the past 5 years. The median free cash flow multiple has been 28.2. And you can see that Google's free cash flow, it's been basically flat over the past five years. So the fair value hasn't changed that much. But the stock price has gone up a ton. So if you look at Google purely based on free cash flow, and you think it should trade at its historic free cash flow multiple compared to where it is right now, then it's 161% too expensive. And this is part of the reason why Google stock I think over the short term it's going to face some market pressures. A lot of analysts always look towards free cash flow and long-term free cash flow is one of the most important metrics. But the big question when you're analyzing Google is whether you think this return on investment is going to be good for them. And one section of the market is very bearish on AI. They do not like AI stocks. They think the whole thing's a bubble. I personally don't fall into that camp. don't really agree with most of the arguments towards that side. There definitely are some private companies and things going on that are in bubble territory and there will be tons of examples that happen. But the actual fundamentals of AI and the technology, not a bubble. And one of the key differences from this compared to the dot bubble is one the valuations a lot of these companies are trading at is much cheaper. But also the idea that there are no just dark or dead data centers sitting around not running. There is a huge compute shortage. That's why all this spending is so high. They need to build out more capacity. One of the many things that happened in the dot era, you saw the dark fiber situation where they were building out all this capacity that wasn't even needed and it took decades for it to fill out. We're not close to that right now in AI. So that's the free cash flow version of the value graph. But if we switch to operating cash flow, this gives a more realistic version of it. And over the next couple years, I would be valuing Google stock based on their operating cash flow. And compared to the historic multiple over the past 5 years for Google stock, it's close to fair value right now. It's about 16% overvalued. And again, you can enter in your own target. So if you assume you want a 25 price to operating cash flow ratio, that would imply the share price would be $382, which would be 19.5% upside from here. or if you want 15% then it would imply the stock has 28% downside from here. But overall long-term Google is a growing business. So their actual fair value is growing over time. So I personally I was buying Google stock a lot more in 2025 during that tariff selloff period. And right now I'm not chasing to buy more. But if it continues to sell off in the coming weeks, this could be another good buying opportunity for Google. And before I wrap this video up, I wanted to cover two other stocks that sold off a ton today. And one is a company that I owned from a long time ago. I bought this back in 2016. That's Tesla, ticker symbol TSLA. I still own that initial position. And it is down 14.25% today. That is a huge sell-off. And this is because Tesla is a very volatile company and their short-term earnings are not that good at the moment. If we take a look at their recent earnings per share, they missed analyst expectations by 34%. EPS for the quarter came in at 33 cents per share. They did beat on revenue though by 6.8%. Revenue for the quarter came in at 28.24 billion. But over the short term, Tesla has a problem with their stock. And in the next 6 months, I don't necessarily see the stock doing that well. And I'll start to explain why. So if we just take a look at the company's revenue, Tesla was on a massive ramp of growth for a while. And if you look at Tesla, pretty much everything actually ties back to its fundamentals in its various business segments. So what was happening here? It was the Tesla Model S. It was the Tesla Model X. They were ramping up. Then what happened? They had the Tesla Model 3, their lowcost, high volume vehicle, and the Tesla Model Y, their slightly more expensive but high volume vehicle. Those took years to ramp up, but once they were producing them at volume, they saw a huge revenue ramp. However, those have stopped growing now. And basically, since then, the Tesla Model 3, the Tesla Model Y, they continue to generate good profits for the company, but it's not a growth vehicle for them anymore. And since 2023, Tesla's revenue has pretty much plateaued. This is an S-curve. So Tesla's largest product segments, their vehicles, their Tesla Model 3 and Tesla Model Y, those ramped up and now they're in the phase of maturity. They're mature product lines. But Tesla, they're kind of a startup now. A $1.2 trillion startup, which is kind of crazy to say, but they are one of those companies, and there are a few examples of these. They're a company that builds more businesses. And right now within Tesla there are various product lines that the expectations are that growth will be even higher than those Tesla Model 3 and Tesla Model Y businesses. And what are those? You have the self-driving business that will come in the form of the subscription that their consumers pay in their cars to have autopilot. And then but the larger of those opportunities longer term is going to be the robo taxi business. But that is a slow roll out right now. A lot of that is due to regulation. The technology has gotten quite good over the past year. But it's the realworld roll out that is the slow part. And as a part of that roll out, you have new vehicle types. You have the Tesla Cyber Cab, which is going to be coming out later this year. It's in the early phases of production right now. That vehicle, it's going to have its own S-curve associated with it. The roll out of robo taxis, that's going to have an S-curve associated with it as well. But right now, we're in that slow phase. It's going to be probably a couple years before they start ramping up. And what Elon Musk, the CEO of Tesla, he would argue that their biggest business is going to be the Optimus robots, the humanoid robots. And in terms of US-based robot manufacturers, Tesla is in the best position by far because they have the real world experience of actually ramping up largecale manufacturing of very complex vehicles. It's kind of like their core expertise as a company. And pretty much in the US, there's Figure, which is probably in the second best position. The founder is actually pretty funny and that uh he's a very smart guy as well. I recommend seeing some interviews from him. Very impressive. But there's a funny thing going on where Elon and I think his name is Brett. Brett, Brett Adcock, they will not mention each other's names or the existence of the other companies. Literally Brett will just say he'll talk like exactly like Elon. He's doing the same exact plan. following a lot of the same business principles and they literally won't mention each other's names. They operate in pure isolation and act like the others don't exist. Now, why do I bring that up? I bring that up to say that Figure AI, which is a smaller position less likely to succeed than Tesla's humanoid robot business. That company as of an entire year ago, and we're talking about a rapid growth AI company, a year ago, that was worth $39 billion. That's what they raised money at. I assume the next time they raise money will be over hundred billion. And I think if they ever go public or if they continue being private and raising money, this is gonna be a company that hits $300 billion, $500 billion. So when you're buying Tesla at a $1.2 trillion market cap, you have to realize that kind of startup that's even more likely to succeed exists within Tesla. That's part of the value you're paying up for. And I'll dive into some of Tesla's other financial metrics. And I'll also tell about another business segment they're working on that is going to cause some pressure on the stock as well. So Tesla's operating cash flow over the coming 12 months, it's at its all-time high, $18.69 billion, up 18% year-over-year. But again, growth has been much slower since the Tesla Model 3 and Y kind of matured. If we look at Tesla's free cash flow, it's actually declined a bit in that time. And part of that is from increased capital expenditures. They build out their own AI data centers. And that's because they have to train these next generation self-driving models. Tesla's actually been a very early AI company, which is why when we're talking about them getting into robotics and humanoid robots and AI training related to that, they're in a pretty good position. They've been doing machine learning and AI for over a decade at this point. Other capex expenses, they're building up new manufacturing lines for these robots. They have a vertically integrated company in so many different aspects. They have like lithium refineries. They've got domestic battery manufacturing plants. They manufacture solar panels. Tons and tons of factories. To one, that gives you even more context about Google's AI spend and how large these AI data centers and how expensive they are in that Tesla is building all of these massive factories and they're spending way less money. But there is another very expensive project that Tesla is working on. It's called the Terraab and they're basically going to become a semiconductor manufacturing company. They have a partnership with Intel and it's a joint venture with Tesla and SpaceX. And this is another thing maybe 5 to 10 years from now. It has some good economic benefits. They will certainly help them vertically integrate and make sure they have good supply of semiconductors coming in. But this is going to be a long project and is going to be a ton of upfront capex. So, when I'm looking at Tesla stock and it sells off 14%. I'm not trying to dive in and buy that right now. If you look at Tesla based on earnings per share in that value graph, it's definitely on the rich side right now. Their earnings per share have actually declined in recent years. And analysts aren't expecting it to really start ramping up until like 3 years from now. And Tesla's multiples are super high. Now, historically, they've been very high. So, it's not necessarily out of bounds with how they've been trading over the past 5 years, which is why I don't know if the value graph is maybe the best way to represent Tesla. In the best case though, it's around fair value right now. And that's assuming you're trading at a very high multiple, whether it's something like 60 times operating cash flow, 200 times free cash flow, absurd multiples that most companies don't get. I guess that's an Elon premium. I don't like to play those games. I only buy Tesla when it's deeply undervalued, and we're not there yet. In my Roth, I had bought some in January 2023 in this uh period when it sold off a ton when he bought Twitter. And earlier this year, I sold some of that and allocated into a different stock cuz I bought it in my Roth IRA, so I didn't have to pay the capital gains on it. And I'll probably do that in the future with Tesla. If they sell off another 40% sometime in the future from here, I'd probably be a net buyer. The other factor with Tesla is there's speculation they may merge with SpaceX, but that is a topic for its own video. And then finally, I'm going to talk about Rollins, ticker symbol Rol. And I'm only mentioning this cuz I got some YouTube comments yesterday. I got two asking me to cover this stock. And that's because after hours, they were starting to sell off. And today, they're down 10.93%. Again, they were another company that just reported earnings. Now, to be fair, compared to Google and Tesla, I personally don't know as much about this company, but I'll give you my thoughts on the financial side of it. And one thing I noticed as I zoomed out over the long term, this has been a great performer in the stock market. All time, it's grown at compound annual growth rate of 11.8%. And that's just from their price return. If we look at their total return going back to 1985, they have a 21,600% total return. That's like 13.82% keer. And this goes to show the power of investing in a consistently profitable company that pays dividends and is growing over time. If you were owning Rollins and you reinvested your dividends over all these years to buy more shares, that compounding effect has been huge, 11,153%. If we look at their dividend overall, it's been a company that has grown their dividend pretty much every single year on a reliable basis. Now, it seems like they've had some special dividends along the way that can be kind of confusing, but their base quarterly dividend over the past 10 years has grown at 15% compound annual growth rate. That is quite good. The current dividend yield is 1.68%. And over the past 3 years, I have this tool on dividend data.com. It's called the yield analyzer on the dividend tab. It lets you see kind of the historical dividend yield daily over time and how it ranks up in the various percentiles over that time. So, right now, this 1.68% 68% dividend yield. It's in the 99th percentile of best time to buy if you're optimizing for that entry point yield. This is a company that's usually in the 1 to 1.5% range. Again, this is for their base dividend. You can see their spikes over time when they had those large special dividends. So, as I'm just looking at Rollins stock, again, I don't know much about the company personally, but the financials speak to this being a pretty good buying opportunity. And on their earnings report, they missed by 4.8. 8% and that's part of the reason for this sell-off. But if you look at the long-term of their earnings per share growth, one, they're basically at all-time highs over the trailing 12 months. And over the past 10 years, their earnings per share has grown 251% overall. That's a 13.42% compound annual growth rate. Analysts are projecting around 10% annual earnings per share growth, which is quite good. And if we look at it based on the P ratio of the company, I call this the PE analyzer, similar to that yield analyzer chart. over the past five years. This is the lowest valuation we could have ever bought Rollins stock at. And it's even the lowest over the past 10 years. Again, we're looking at historical PE ratios every single day over the past 10 years. This is the lowest valuation you could have ever bought the stock at. So, if you're someone who is interested in Rand stock, this could be a good entry point. Going back to the value graph, we can see the price versus fair value. And right now, it's 32% below the implied fair value based on earnings per share. That's the lowest over the past 5 years. Dividend yield is 35% below implied fair value. It's the lowest of the past 5 years. Free cash flow 31% the implied fair value. Again, the lowest of the past 5 years. Operating cash flow, same exact thing, 30% below implied fair value. Revenue, same thing. Ibida, same thing. Book value almost the same thing. So, purely in terms of the financials, Rollins looks like it's in a good spot right now. Could be a good opportunity to buy the dip on this stock. I personally added it to my watch list because I wasn't following the company. And now I'll bring into the rotation of companies I follow. And if you want to use the stock research tool I showed throughout the video, all of this is available at dividendata.com. Link in the description and pin comment. We currently have a 50% off annual membership deal. And you can lock in that discounted price for life. That's to celebrate the launch of our new version of the tool, the next generation dividend.com. And if you enjoyed the video, make sure to leave a like, comment, and subscribe to the channel. and I'll see you in the next one.