'Consistent and robust': Here's what Wall Street is saying about Alphabet's earnings beat

Greg Sandoval/Business InsiderGoogle CEO Sundar Pichai at the 2018 I/O conference. He once said AI was a more profound invention than ‘electricity or fire.”


Google parent-company Alphabet on Monday crushed Wall Street’s earnings estimates despite a hefty fine from the European Union’s competition regulator. Shares are set to open at an all-time high, up about 5% ahead of Tuesday’s opening bell.

While the $US5 billion penalty did have a short-term impact on net income, which came in short of the same quarter last year, analysts on Wall Street see it as merely a small speed bump on the company’s long-term trajectory. Their average price target is now $US1,340 – up from $US1,259 last week – according to data compiled by Bloomberg.

Business Insider rounded up analyst notes from six major sell-side-research shops to get a glimpse of how analysts digested the second-quarter results:

Goldman Sachs

Price target: $US1,450 (from $US1,350)

“Unlike last quarter, we believe this quarter will hit on almost all areas, namely, strong topline momentum remains in both its core business but also Google Other revenue accelerated slightly with help from Cloud and hardware,” analyst Heather Bellini said.

“Strong topline was combined with total traffic acquisition costs (TAC) spending that came in below consensus, with yoy growth decelerating to 26% from 36% in 1Q18, and most watched Sites TAC growth moderating from 61% yoy in 1Q18 to 47%. All this led to EBIT outperformance for the first time in 3 quarters.”

Credit Suisse

Price target: $US1,375 (from $US1,300)

“Google reported a high-quality quarter in which the bulk of the top line outperformance vs. CS came from Websites (ongoing strength in mobile search, YouTube, as well as desktop search) followed by Network revenue (AdMob and programmatic),” analyst Stephen Ju said.

“Hardware contributed less this quarter to its L&O business, with Cloud and Play cited as the lines with greater dollar growth. As we have noted previously, we are happy to underwrite Google’s investments as this should enable the company to sustain what should be greater-than-20% FX-neutral revenue growth over the longer term.”

RBC Capital Markets

Price target: $US1,400 (from $US1,285)

“All in, fundamentals remain very consistent & robust – unprecedented 34 straight quarters of 23% Y/Y growth. Although 24% GAAP Operating Margin was below the three-year average of 26%,” analyst Mark Mahaney said.

“There has been debate about the sustainability of Ad Revenue-based ‘Net businesses. We term the debate ludicrous. The largest Ad Revenue-based ‘Net business has now averaged 23% growth for 34 (count ’em) straight quarters & shows no signs of slowing. Despite a $US120 billion revenue run-rate. And we would argue that Google still accounts for at most 10% of global ad spend. And the company’s investments in Cloud, Internet-connected Homes, and Autonomous Vehicles potentially set the company up for more years of premium growth & profits. There is regulatory risk, though we have yet to find evidence that regulations will adversely impact the usefulness of Google for consumers or advertisers.”

Jefferies

Price target: $US1,450 (from $US1,360)

“Q2 results felt similar to Q1 – in a positive way (except for EC fine): strong top line, OpEx well controlled q/q though margin still compressed y/y, and elevated capex. Core search remains strong (led by mobile trends), and we continue to see large potential from 4 “call options” (YouTube, Cloud, hardware, Waymo), which should help drive the next $US100 billion in revs,” said analyst Brent Thill.

“Other notable takeaways: 1) Waymo passed 8M miles of autonomous driving tests on public roads. The pace is accelerating: it only took ~1 month to add the last million miles, vs. 2 mos from 6 million to 7 million miles and 16 months from 1 million to 2 million miles. Still on track to launch a commercial rider program in Phoenix by yr-end. 2) Paid clicks on Google properties grew 58% y/y, after 59% in Q1, and vs. the toughest comp of the year (+61% in 2Q17).”

Nomura Instinet

Price target: $US1,400 (unchanged)

“The company pointed to strength in Asia-Pacific as a particularly strong geography (+34% y/y ex-FX) on the top line and the bottom line benefited from Network Traffic Acquisition Costs (TAC) that moderated as a percentage of Network revenue as the mix within the programmatic business was more favourable this quarter (programmatic as a whole is typically a drag on margins),” analyst Mark Kelley said.

“Outside of the advertising business, Cloud continues to be a focal point within Alphabet’s portfolio of businesses, both in terms of capex and hiring. Management noted it believes we may be at an inflection point for Cloud growth, with the opportunity expanding at a pace that would likely allow for multiple successful competitors. There was little commentary on the General Data Protection Regulation (GDPR) and the EC’s Android fine, citing recent implementation/enforcement.”

GBH Insights

Price target: $US1,300 (unchanged)

The Street was anxiously awaiting Alphabet’s earnings after the bell as the company had another “prove me” quarter on the advertising front with headline results handily beating expectations. While the EU fine was not in Street numbers on an apples to apples basis, Alphabet delivered better than expected headline numbers,” said analyst Daniel Ives.

“While regulatory clouds and margins continue to be overhangs on the name, we believe 2Q advertising and “bread and butter” search revenues were healthy and a good barometer of potential strength heading into the rest of 2018/2019. YouTube advertising revenues continues to be a “crown jewel” for the company and a major tailwind heading into the next 12 to 18 months. “

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