Alphabet Earnings Beat But Rising Traffic Aquisition Costs Concern

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    The week of the FANG, internet monsters Alphabet,…


    Super Harley

    At least they are honest in calling whole spec division ‘other bets’


    Barclays Note:

    Alphabet Inc.: Revenue Strong Amidst Another Noisy Expense Print

    Stock Rating Overweight
    Industry View Positive
    Price Target USD 1250.00
    Price (23 Apr 2018) USD 1073.81
    EPS FY1 (E) 45.02
    EPS FY2 (E) 47.70
    Market Cap (USD bn) 746.6174
    Ticker GOOGL

    Google reported revenue and recurring EPS that were 3% and 7% above, but missed consensus OI by 9%. As expected, a number of noisy items impacted both OI and EPS, including marking up the Uber stake (and related performance expenses in G+A), the Waymo-Uber settlement and the HTC acquisition.

    Stepping back, what matters the most on these kinds of GOOGL prints historically is that Sites revenue growth is well ahead of expectations and not decelerating at all despite a tougher comp (and next quarter core Google margins trajectory and Sites TAC should improve). We’ve had a temporarily muted stance on the group in 2018 (see The Playbook After “The Generals Have Been Wounded”, 4/12/2018), but think GOOGL shares are over-sold here and would selectively add to positions.

    Positives: Mgmt. tone was upbeat as sites rev grew 23% y/y ex-fx, ~3 pts above buyside est., led by:
    1) mobile search, 2) strength in desktop, & 3) YouTube. Other Americas accelerated to 35% ex-fx (vs 30% in 4Q17), driven by Sites strength & several h/w launches. GOOG handily beat Street EPS with a $3b gain from marking up its Uber stake (and other pvt. investments in non-marketable securities), which added $3.40 to EPS after tax, and highlights asset value that the market currently assigns zero towards.

    Negatives: Opex & Capex were again the two big concerns. Core-Google op margin was down ~320bp Y/Y to 27% driven by higher expenses across the board: 1)Mobile TAC; 2) infrastructure, h/w & YT rev share expenses in COGS; and 3) S+M deleverage from h/w & cloud marketing. Capex was up ~2x Y/Y but half related to facilities ($2.4bn acquisition of the Chelsea Market & $1b on other facilities) and
    puts GOOG on pace to invest ~$20bn in 2018 (up ~50% Y/Y).

    Nest is losing $621min OI on $726m in rev in 2017, which is surprising given the north of 65% GM for the HW based on our estimates (and could be an area for OI improvement in 2018 under the new structure).


    Alphabet Inc. $GOOGL analysts reactions

    Barclays maintains Overweight with Price Target $1250.00
    Credit Suisse maintained its Outperform rating with a $1,350 price target.
    Merrill Lynch maintained its Buy rating but lowered its price objective to $1,270 from $1,360.
    Pivotal Research maintained Alphabet as Hold but cut its price target to $970 from $1,040.


    ^^^ +1s … Excellent commentary – as “Google never sleeps” … While they will continue to do well — some of the Facebook-like privacy concerns & EU’s new GDPR policy on 05/25 might impact them. Still they are among top 5 TECH firms that will do great for the foreseeable future 8)

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