Parsing Through the Quarter for Alphabet Inc Class A (NASDAQ:GOOGL)

Alphabet Inc Class A (NASDAQ:GOOGL) turned in its Q3 report card on Thursday. We saw another revenue miss. However, as discussed on the call, you really can chalk this one up to foreign exchange related issues given the high impact of South American currencies for the company. To nail this point home, GOOGL actually beat on the topline when measured on a constant currency measure.

Traffic acquisition costs (TAC) shrunk a bit further as well. That helped operating margins improve – up to 31.8% from 30.9% in Q2. That said, the stock got hit on the results because of its miss on EBITDA numbers ($12.8 bln v $13.0 bln est).

Alphabet Inc Class A (NASDAQ:GOOGL) saw improvement in its cloud business, which continues to perform. Paid Clicks down 28% vs down 21% expectations. How the company manages to innovate around this trend will be relatively important going forward.

At the end of the day, the stock’s basic valuation remains very attractive. This is not your typical “FAANG” stock in that regard.

In raw data terms, GOOGL reported Q3 (Sept) earnings of $13.06 ($11.86 mark to market equity gain) vs. the $10.41 Capital IQ Consensus; revenues rose 21.4% year/year to $33.74 bln vs the $34.0 bln Capital IQ Consensus. Advertising rev +20%, TAC +20% vs. +26% in Q2; paid clicks +62%, cost-per-click -28%.


The Word on the Street

Here are our notes on the response from the sell side on the data:

Pivotal Research notes Alphabet sustained >20% constant currency growth for the 13th consecutive quarter. They continue to see Alphabet as the dominant player in advertising — digital or otherwise — and expect the company to continue to take share of that market. However, gradually rising operating costs and significant ongoing capital expenditures lead them to their relatively neutral view on the stock. On balance they view the quarter as mixed, with positive elements from sustained revenue and profit growth partially offset by much higher capital expenditures than they anticipated; Hold.

Oppenheimer: While investors will focus on slowing 3Q revenue growth and reduced consolidated margins, results appear stable if you look at the two-year comp and focus on Google Segment EBITDA; Outperform.

  1. Riley FBR notes 3Q was mostly on track, with mobile and YouTube continuing to perform well with the highest growth rates geographically once again in APAC and Other Americas and expected slowdown (tough comps) in EMEA. They tweak their FY18/FY19 revenue by 1%/0% and their FY18/FY19 GAAP EPS from $37.96/$48.47 to $41.15/$48.48. Maintaining their $1,475 PT, they value the core business at 11x AEBITDA (13x ’19 prev.) and 5x 2020 revenue (7x ’19 prev.) for the Other Bets segment.

Monness Crespi lowers tgt to $1315 from $1415.

Credit Suisse cuts tgt to $1450 from $1500.

Canaccord Genuity lowers their GOOG tgt to $1140 from $1170. Alphabet’s Q3 results displayed modest growth deceleration, with Properties growth decelerating to 22% from 26% last quarter, with mobile search and YouTube remaining the primary drivers. On the margin front, Properties TAC ticked back up to 13.1% of revenue, up from 12.9% in Q2. Despite the modest deceleration, we remain encouraged by GOOGL’s ability to keep revenue growth fairly high while managing to a more reasonable amount of gross margin pressure relative to the past few years. For now, we remain on the sidelines as: 1) some of the strength in revenue continues to come from desktop search, and we wonder how sustainable this is; 2) Q4 may bring incremental margin pressure from higher hardware sales and Youtube content costs; and 3) despite the improved growth, the multiple is high by historical standards.

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