Why Analysts Are Optimistic on Alphabet After Earnings

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Alphabet Inc. (NASDAQ: GOOGL) released its third-quarter financial results after the markets closed on Monday. Although these results failed to impress investors, analysts seemed to be more sympathetic and maintained their views on Alphabet.

24/7 Wall St. has included some highlights from the report, as well as what analysts said after the fact.

The tech giant posted $10.12 in earnings per share (EPS) and $40.50 billion in revenue. That compared with consensus estimates of $12.42 in EPS and $40.32 billion in revenue, as well as the $13.06 per share and $33.74 billion reported in the same period of last year.

The Google segment posted third-quarter revenues of $40.34 billion, up from $33.59 billion a year ago. Operating income rose from $9.49 billion to $10.87 billion. The operating loss on Other Bets totaled $941 million, up from $727 million in the year-ago quarter.

In the third quarter, year-over-year traffic acquisition costs paid to Google Network members fell by about one percentage point to 69% of Network revenues, or $3.63 billion. Payments to distribution partners totaled $3.86 billion, about 13% of websites revenues. Total traffic acquisition costs rose from $6.58 billion to $7.49 billion.

Paid clicks on Google websites increased 18% year over year and were up 1% sequentially. Aggregate cost per click fell 2% compared with the year-ago quarter and was up 3% sequentially.

Merrill Lynch reiterated Buy rating with a $1,450 price target, implying an upside of 12.5% from the most recent closing price of $1,288.98. The brokerage firm provided its investment rationale:

Alphabet is well positioned long-term with leading search technology, Android and YouTube. Alphabet is also an advertising industry leader and the company should generate incremental revenue growth from increasing mobile usage, video usage, Google Play activity, and connected device activity(including autos). We believe Google should trade at a premium to its peer group given shareholder friendly actions (buy backs and disclosures) and new product catalysts.

Credit Suisse reiterated an Outperform rating with a $1,700 price target. The firm detailed in its report:

Google in our view is a controlled outcome, with management looking to drive consistent revenue and free cash flow (FCF) growth through the amassing and creation of a portfolio of assets even as the law of large numbers begin to result in deceleration for some of the largest businesses. Overall, revenue growth has once again settled into a managed ~20%+ range – we note that somewhat lost among investor focus with the events of1H19 was that Google has resumed FCF growth after two years of investments. Otherwise, it was a top and bottom line beat with FX-neutral revenue growth remaining at 22% (vs. 22% for 2Q19 and 19% for 1Q19) – Google Websites and L&O exceeded our estimates while Network fell modestly short due to privacy policy changes. Adjusting for the one-time events of $554 million in a legal settlement and $1.5b equity mark to market loss as well as a $227mm in performance fee reversal in OI&E, both Adj. EBITDA and EPS exceeded our and Street projections.

Here’s what other analysts had to say:

  • Guggenheim reiterated a Buy rating and lowered its price target to $1,460 from $1,525.
  • Canaccord Genuity reiterated a Buy rating and raised its target to $1,450 from $1,350.
  • Stifel reiterated a Hold rating and raised its price target from $1,299 to $1,325.
  • KeyCorp reiterated a Buy rating with a $1,546 price target.
  • Barclays also reiterated a Buy rating, but with a $1,400 price target.
  • Pivotal Research reiterated a Hold rating with a $1,445 price target.

Shares of Alphabet were trading down 2% at $1,260.42 on Tuesday, in a 52-week range of $977.66 to $1,299.24. The consensus price target is $1,431.65.


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