- Alphabet, Google’s parent company, fell modestly Tuesday after the company reported quarterly and full-year earnings the prior evening.
- Analysts who track the stock weighed in on the results with mixed reactions. Some left their price targets unchanged, while several made cuts, citing disappointing margins.
- Still, many held their positive long-term views , and recommended that clients buy the stock for Alphabet’s consistent growth.
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Alphabet shares traded slightly lower Tuesday morning as Wall Street delivered a classic reaction to its earnings which were released the prior evening: the results were good, but not good enough.
While Alphabet reported revenue and profits for the fourth-quarter that topped Wall Street’s expectations, analysts said the internet giant’s margins were disappointing. That revelation led some to slash their price targets, but the majority of analysts who track the stock maintained their positive long-term outlooks.
Barclays analyst Ross Sandler told clients that while Alphabet beat estimates on both the top and bottom lines, its margins were still “imploding” in the fourth-quarter.
“Revenue growth remains stellar, but the pace of margin erosion continues to disappoint, based on mix shift & one-time items, he wrote. “Importantly, mgmt noted that the pace of headcount & capex growth will moderate in 2019.”
Sandler added: “The last time the CFO flagged a change in expense trajectory was Sites TAC which improved meaningfully, hence this call-out is to be taken with some gravity.”
He slashed his price target from $US1,400 to $US1,350, but maintained an “overweight” rating on the stock. That long-term positive sentiment, despite many cutting their price targets, was rather consistent across Wall Street.
Here’s a snapshot of what other investment firms are telling clients about Alphabet’s results:
Credit Suisse: ‘A Lot to Unwind but FCF Growth Recovery Thesis for 2019 Still Valid’
Price target: $US1,400 (from $US1,450)
“Our price target is now $US1400 as we increase our revenue, OpEx, and CapEx estimates, and we maintain our Outperform rating as our thesis based on the following factors remains unchanged: 1) ongoing monetisation improvements in Search through product updates, 2) larger-than-expected contribution from Google’s larger non-Search businesses 3) optionality for value creation from new monetisation initiatives such as Maps as well as the eventual commercialization of Google’s Other Bets (Waymo, Life Sciences),” analyst Stephen Ju wrote in a note sent out to clients on Tuesday.
Susquehanna: ‘Business Still Strong, But…’
Price target: $US1,340 (from $US1,450)
“Our positive mobile search and YouTube thesis continues to play out as demonstrated by the reacceleration in sites revenue ex-FX growth. That said, the big black box of expenses was higher than expected and led to the consensus profit miss,” analysts Shyam Patil and Brendan McGoldrick said.
“While we continue to expect robust top-line performance, we’re taking a more conservative view toward EBITDA and margins in 2019, leading to downward revisions and a decrease in our price target to $US1,340. Nevertheless, we still like the long-term story and remain Positive.”
RBC Capital Markets: ‘Hey Google… Can You Stabilise Margins?’
Price target: $US1,300 (from $US1,400)
“The largest Ad Revenue-based ‘Net business has now averaged 23% growth for 36 straight quarters & shows no signs of slowing,” analyst Mark Mahaney wrote.
“The Rub… Margin Trends – GAAP Op Margin was 21%… the lowest we’ve seen in many years… mostly due to rise in other COGS (YT, data centres, hardware) and at R&D (due to revaluing up of Other Bets assets, which causes comp expense at those segments to rise). Key context, the 280 Y/Y Op Margin decline in Q4 was largely consistent with recent trends.”
Jefferies: ‘Juggling Spending Spree for Future Growth’
Price target: $US1,450
“Great top line, but margins disappointed on heavy spend to fuel ST & LT rev growth. Margin pressure may constrain valuation multiples, but those are only a couple of catalysts away from expanding – e.g., from better segment disclosures or prospects for eventual mgn rebound,” Brent Thill said.
“Q4 revs were positive – beating on gross rev, net rev, and core advertising segments. However, non-GAAP op mgn 25.8% missed our 28.2% est. and Street’s 27.5%.”
Macquarie: ‘4Q’18: Revs Strong; OpEx Growth Stronger’
Price target: $US1,150
“Revs remains remarkably consistent, opex continues to increase as a percentage of revs, and the model drivers remain as opaque as ever,” Benjamin Schachter wrote in a note out Tuesday. “A now $US157b rev-run rate company maintaining FX-adj rev growth of 22%-24% for 13 straight qtrs is simply incredible.”
He added: “Advertising continues to be the key driver, as Other rev still represents just 15% of total revs for the year (up only one point y/y). At some point this growth will decline, but predicting when and how quickly remains very difficult (to say the least). In our view, this is clearly a key for the stock. If revs do decline, but can maintain 15%-20% y/y growth over the next few years, the stock is a must own.”
SunTrust: ‘Solid 4Q18 Results Fuelled by Higher Spending’
Price target: $US1,350 (from $US1,450)
“Core (Search and esp. Youtube) continues to perform at impressive growth levels, supported by scaling segments (Cloud, Play and hardware), and emerging ones (Waymo),” Youssef Squali told clients on Monday.
“We believe Alphabet can sustain mid-teens growth over several years, with a focus on incremental profit dollars/FCFs, making GOOGL an attractive growth story at a compelling valuation. That said, regulatory risk still looms large in Europe and increasingly in the US.”
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