Analysts are sticking by Alphabet in the face of the stock drop. Here's what they had to say

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Wall Street analysts were rattled by Alphabet‘s increased spending in the fourth quarter but largely defended parent of Google, saying they didn’t believe investors fully understood the stock and more transparency from the company about all its big long-term bets would help the stock.

Analysts also were trying to make sense of Alphabet’s increased competition in digital advertising, rising costs and renewed margin concerns. Despite all that, some analysts even raised their price targets after the earnings report Monday, saying the company was still a good long term buy.

The internet giant’s stock opened little changed at $1137.58.

“There were likely several bright spots within revenue growth (such as YouTube and possibly cloud), but lack of disclosure conceals business trends, while the ongoing investment in cloud, hardware and YouTube content is pressuring margins,” Bank of America analyst Justin Post said in his earnings recap note to clients. “Overall, a somewhat frustrating (quarter) for a business seemingly on a good trajectory.”

Continuing the theme of transparency, Morgan Stanley’s Brian Nowak said, “4Q highlights the strength of GOOGL’s core and portfolio of assets, difficulties in modeling (quarterly) ins and outs, and need for better transparency.”

Barclays analyst Ross Sandler opened his note to clients saying, “But margins are still imploding in 4Q … revenue growth remains stellar, but the pace of margin erosion continues to disappoint, based on mix shift & one-time items.”

“We maintain our overweight rating, but prefer other FANG names Facebook, Amazon,& Netflix to Google,” said J.P. Morgan’s Doug Anmuth.

Expenses were also a concern for RBC’s Mark Mahaney, who wrote: “Growth remained very consistent though expenses came in higher from Other COGS, including costs related to YouTube, & R&D.”

Analysts at UBS and Deutsche Bank actually raised their price targets with Deutsche Bank noting, “We feel good about the near and long term ability for Google to sustain top line growth given 1) its 8 properties that each have over 1B monthly users, 2) the leverage that AI/ML brings not only to the platform, but also to newer initiatives such as Cloud and Waymo, as well as 3) the hardware business that is gaining momentum.”

Here’s what the big analysts are saying:

“Overall, we believe Alphabet continues to execute well as evidenced by both the acceleration & long-term stability in top-line growth… 23% FXHN Alphabet revenue & Google Properties growth shows continued innovation in core search & YouTube advertising, w/no discernible impact from either macro weakness or Amazon competition… But the focus around GOOGL’s expenses & margins will remain heavy, even w/some spending moderation into ’19… Importantly, we believe the Other Bets accrual will likely remain elevated going forward, though this is actually a good problem to have as it is directly tied to increasing valuation for a component of Other Bets… Still, our revenue estimates are generally increasing 2-3% going forward and our operating income is coming down by ~3%, which could keep shares range-bound in the near-term… We maintain our Overweight rating, but prefer other FANG names Facebook, Amazon, & Netflix to Google…”

“Revenue strength, but margins & disclosure still lacking… There were likely several bright spots within revenue growth (such as YouTube and possibly cloud), but lack of disclosure conceals business trends, while the ongoing investment in cloud, hardware and YouTube content is pressuring margins (operating income up just 7% y/y)… Overall, a somewhat frustrating Q for a business seemingly on a good trajectory, and stock was down 3% after hours… While we are encouraged by revenue strength and potential that y/y expense growth starts to decelerate, the quarter showed little regard for the cost discipline (Google did not manage operating profit to Street estimates) or disclosure requests from shareholders… We, however, continue to be impressed with revenue growth and emerging opportunities and maintain our Buy rating. Potential catalysts from here include: 1) new search ad formats (Google highlighted that changes can have an impact on the call); 2) Data points highlighting YouTube strength; 3) visibility on Google Cloud (April conference) and Waymo progress; and 4) still high, but slowing headcount and expense growth post 1Q…”

“We Remain Focused on Growth At Scale… Against fears of a slowdown and/or macro impact to digital advertising, GOOG produced strong Gross/Net Sites revs growth (well ahead) as both search, YouTube & TAC produced a solid combo… While OI margin volatility (YT putting pressure on costs, R&D across the firm ahead of our ests & Google capex doubling in ’18) might detract from the rev story, we see a two-fold narrative emerging: a) investors should better understand that such investments are key for LT opptys (media consumption, hardware, cloud, AI/machine learning & Waymo); & b) mgmt comments about moderating headcount growth (R&D) and capex in ’19 should point to relief from recent volatility… We reiterate our Buy rating & emphasize our LT view of GOOG (driven by their positioning toward the future of both consumer & enterprise computing trends) as a top pick for investors looking for exposure to LT secular growth themes in our sector at a reasonable valuation..”

“Alphabet reported a mixed quarter, with Sites revenue ex-FX modestly ahead of our ests but disappointing operating income, weighed down in part by unusual compensation linked to Other Bets… On the positive side, the company reiterated optimism on its ability to sustain top line growth and the expectation that headcount growth would slow modestly in 2019 and capex growth would moderate significantly in 2019… We were encouraged by these comments, though the Street was already largely modeling this… The company also made some cryptic comments on the timing of monetization tweaks, which could be taken as a positive; the last time the CFO made these comments was around adding the third link in mobile in 3Q15… Regardless of the meaning of these short-term comments, we feel good about the near and long term ability for Google to sustain top line growth given 1) its 8 properties that each have over 1B monthly users, 2) the leverage that AI/ML brings not only to the platforms (Search, YouTube, Android), but also to newer initiatives such as Cloud and Waymo, as well as 3) the hardware business (Chromebooks, Pixel) that is gaining momentum…”

“4Q highlights the strength of GOOGL’s core and portfolio of assets, difficulties in modeling qtrly ins and outs, and need for better transparency… Remain OW as GOOGL’s core/Other Bets are strong and appreciating in value. But it may take revisions or disclosure for the market to appreciate that…Over the next 90 days we expect the market to debate what GOOGL meant by a “meaningful” deceleration in capex growth in ’19 and more “moderate” headcount growth in ’19… We fully admit we aren’t really sure, but for perspective we model capex growth to slow to 20% (from 91% in ’18) and for headcount growth to slow to 18% (from 23%)…”

“But margins are still imploding in 4Q…Alphabet reported rev/EPS 1%/18% above consensus but missed EBIT by 5%… Revenue growth remains stellar, but the pace of margin erosion continues to disappoint, based on mix shift & one-time items… Importantly, mgmt noted that the pace of headcount & capex growth will moderate in 2019… 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… At the very least it makes us slightly more optimistic around EBIT growth in 2019 all else equal. Stepping back, at 22x 2020 EPS, GOOGL is fairly valued vs the flat consolidated EBIT growth rate, but if that were to revise upward, or GOOGL were to realize value for assets outside search, we see meaningful upside…”

“GOOGL Q4 Revenue came in just above expectations, tho Op Income came in below. Growth remained very consistent tho expenses came in higher from Other COGS, including costs related to YouTube, & R&D (Other Bets revaluations raising stock comp)…The largest Ad Revenue-based ‘Net business has now averaged 23% growth for 36 straight quarters & shows no signs of slowing. Despite a $160B revenue run-rate… 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, tho we believe that Google hasn’t been impacted by GDPR as EMEA growth has been stable the last 6 months… Valuation remains very reasonable at ~18x Core Google ’19E GAAP EPS, adjusting for cash…”

“Alphabet delivered a solid but mixed 4Q18 report, with 4Q18 revenue roughly in-line, Operating Income and Adj. EBITDA slightly below, and commentary about 2019 opex and capex that was encouraging from a margin and FCF perspective… Google Properties’ Gross Revs of $27.0bn grew 23% y/y FXN, and Total Gross Profit of $21.4bn grew 18% y/y… Operating Income was negatively impacted by higher Other COR (YouTube) and S&M spend, and Operating Margins continued to decline meaningfully…While mgmt said to expect capex growth to slow meaningfully in 2019 and for headcount growth (opex) to slow moderately, it was not prescriptive…”

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