How Analysts Blocked Alphabet’s Road to Being a $1 Trillion Company

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Alphabet Inc. (NASDAQ: GOOGL) reported fourth-quarter and full-year 2017 results after markets closed Thursday. While its earnings fell short of estimates, the carnage in the broad markets only made things worse for this search giant. Analysts took this opportunity to update their targets on Alphabet, and most views were mixed.

24/7 Wall St. has included some highlights from the earnings report, as well as what analysts said about Alphabet afterward.

The search engine behemoth reported diluted earnings per share (EPS) of $9.70 on revenues of $32.32 billion. In the year-ago quarter, Alphabet posted EPS of $9.36 and $26.06 billion in revenues. Analysts had estimated EPS of $9.98 on revenues of $31.87 billion.

The Google segment posted fourth-quarter revenues of $31.91 billion, up from $25.8 billion a year ago. Operating income rose from $7.88 billion to $8.76 billion. The operating loss on other (Bets) revenues totaled $916 million, down from $1.09 billion in the year-ago quarter.

Revenues at Google websites rose from $17.97 billion to $22.24 billion, and Google Network revenues rose from $4.43 billion to $4.99 billion. Ad revenues rose from $22.4 billion to $27.23 billion.

Traffic acquisition costs paid to Google Network members rose by four percentage points to 74% of Network revenues, or $3.67 billion. Payments to distribution partners totaled $2.78 billion, about 24% of websites revenues. Total traffic acquisition costs rose from $4.85 billion to $6.45 billion.

Paid clicks on Google websites were up 48% year over year and 18% higher sequentially. Paid clicks on the Network members sites were up 130% year over year and 9% sequentially. Aggregate cost per click fell 14% compared with the year ago quarter and was 6% lower sequentially.

Merrill Lynch maintained its Buy rating on Alphabet. The firm had two main points:

  • Margin concerns could impact sentiment; we highlight that Alphabet has been disciplined with expenses over time.
  • Even with margin compression, revenue growth supports mid-to-high-teens earnings growth, which supports valuation.

Credit Suisse raised its price target to $1,400 from $1,350. Its report went on to say:

Operating margin and profit dollars fell short of our estimates despite the top line beat given higher contribution from lower margin streams of revenue (hardware). The bright spot was the disclosure that Cloud business is now at a $1b per quarter run rate and is likely growing well in the triple-digit range.

Stifel downgraded Alphabet to Hold from Buy but kept its $1,150 price target. The firm noted competition from Amazon on search for consumer products hurting Google search long term.

A few other analysts also weighed in on Alphabet after the earnings report:

  • Oppenheimer reiterated an Outperform rating and raised its target to $1,340 from $1,180.
  • Barclays raised its price target to $1,330 from $1,260.
  • Cowen raised its price target from $1,230 to $1,300.
  • Credit Suisse increased the price target to $1,400 from $1,350.
  • JPMorgan raised its target price to $1,330 from $1,200.
  • Raymond James raised the target to $1,300 from $1,200.
  • Deutsche Bank lowered its price target to $1,375 from $1,400.
  • Morgan Stanley dropped its price target from $1,215 to $1,200.

Shares of Alphabet closed Friday down 5% at $1,119.20, with a consensus analyst price target of $1,232.21 and a 52-week range of $814.29 to $1,198.00.