Although Wall Street is giving tepid reviews to Alphabet Inc (Nasdaq: GOOGL, GOOG) and its first-quarter earnings results, analysts say the technology behemoth and parent company of Google still remains an outstanding stock for long-term investors to hold.
Alphabet has the unique position as a large-cap company to deliver the growth rates of a small-cap company, says K.C. Ma, director of the Roland George investments program at Stetson University in DeLand, Florida.
Shares of Alphabet were unmoved after the company reported “unambiguous beats” on both revenue and earnings fronts.
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“Although earnings was up 72 percent from a year ago, $3.40 of the $13.33 earnings per share was from investment gains on equity securities and the company also noted that traffic acquisition costs increased,” he says. “The unimpressed price movement may have reflected that short-term traders took profit in the current volatile market environment.”
GOOGL earnings by the numbers. Alphabet reported revenue of $31.15 billion compared to $30.29 billion that was expected based on a Thomson Reuters consensus estimate. Alphabet EPS was $9.93, beating the $9.28 based on the consensus estimate from Thomson Reuters.
The tech company adopted a new accounting standard and reported a $3 billion gain on equity securities for the first time, showing a gain of $3 billion when it invested in ride sharing app company Uber and other companies. Google’s venture capital segment invested $258 million in 2013 in Uber, which is now valued at $60 billion, compared to $3.8 billion five years ago.
Google’s ads business reported first quarter revenue of $26.642 billion while its cloud business and hardware sales were nearly $4.3 billion, compared to $3.2 billion year-over-year, and includes Nest, its smart home division.
The number of paid clicks through its search engine and YouTube rose by 8 percent year-over-year while cost-per-click declined by 7 percent year-over-year.
Alphabet “delivered on both the top and bottom lines, with a strong beat on earnings per share,” says Shawn Cruz, manager of trader strategy at TD Ameritrade, an Omaha, Nebraska-based brokerage firm.
Much of the good news was attributed to its stake in Uber by Google Ventures, he says.
The company altered its monetization metrics for Google’s Network properties from clicks to impressions this quarter. Investors were also interested in the new metrics Alphabet will begin reporting each quarter, especially the cost-per-click changing to cost-per-impression, which fell 10 percent and is a good sign, Cruz says.
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Google’s total traffic acquisition costs, or what the company pays when websites or smartphone manufacturers use its services such as the search engine, reached $6.28 billion, or 24 percent of the company’s advertising revenues, compared to 22 percent during in the first quarter of 2017.
“Improvements to traffic acquisition costs were also well received,” Cruz says. “They also began breaking out Nest from its “other bets” category into “other revenues,” which should interest investors.”
Outlook for GOOGL stock. Google’s biggest strength is its consistent high revenue growth rates and high margins since their IPO, Ma says.
After the growth in digital advertising levels off, Google needs to replace it with the next-gen cloud business, which will “guarantee their leading position in sustainable long-term growth,” he says.
Google faces several risks in 2018, such as the implementation of the European General Data Protection Regulation in late May.
“There are still some overhangs on Alphabet, as potential regulatory scrutiny over its data practices is still uncertain,” Cruz says. “Investors will want to know how this affects Google’s ability to monetize the massive amount of data they have access to.”
Both Facebook and Google investors will be tracking how the regulatory issues play out and what changes the companies face for their business practices in the aftermath, he says.
The fundamental backdrop for Google’s businesses remains strong, Barclays analyst Ross Sandler wrote in an April 11 report, rating it overweight with a price target of $1,330.
“Despite our view that 2018 will be a consolidation year for mega-cap internet, the stock underperformance of late has been even surprising to us,” he wrote. “We would take advantage of the weakness around regulatory concerns and the overall space to add to positions.”
Google faces potential risk around taxes, Android and anti-trust from the EU and possibly the U.S. regulators, Sandler says.
“This is nothing new to long-term Google investors and historically has created good entry points,” he says.
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Despite the uncertainty, two factors could boost the company’s earnings per share, Sandler says. The company has over $100 billion in cash and since LIBOR rose recently, Google could net another $1.4 billion from interest income. The new accounting standard Google adopted means that unrealized gains and losses on non-marketable equity investments will now be recognized on the income statement while they were not shown on financial statements in the past.
Alphabet is viewed favorably by other analysts — Bank of America has a “buy” rating and $1,360 price target for Alphabet. GBH Insights has a “highly attractive” rating and $1,280 target for GOOGL stock.
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Alphabet Inc (GOOG, GOOGL) Remains a Great Long-Term Stock originally appeared on usnews.com
