Alphabet’s ‘bets’ promise more growth ahead: Analysts applaud tech giant’s results

Alphabet Inc. is spending like crazy, but growing like crazy too, and that’s good enough reason for investors to stick with the tech giant.

So say some analysts, wowed by the Google parent’s GOOGL, +1.10%GOOG, +1.74% blowout results that sent shares up by more than 4% in premarket trading on Tuesday.

“Alphabet continues to invest heavily in front of large growth opportunities, while its core ad business continues to churn out impressive growth,” said analysts at KeyBanc Capital Markets, as they lifted their price target on Alphabet to $1,430 from $1,230 a share in a note to clients late Monday. The team of analysts, led by Andy Hargreaves, is keeping an overweight rating on the company.

Had it not been for a hefty European Union antitrust fine, Alphabet would have earned $11.75 a share in the second quarter — well above expectations of $9.64 a share. Advertising revenue also outstripped expectations, Monday’s results showed.

Noted by KeyBanc, though, was a jump in spending by the tech company on its many investments — a total of $23 billion on the cost of revenue, operating expenses and capital expenditure in the second quarter. But because Alphabet has such favorable positions across several big markets, they don’t think the rate of spending is such a big worry for investors.

“We believe strong growth potential remains in opportunities with cloud, hardware, YouTube, Waymo and other bets, which should add significant value over time,” said Hargreaves.

The KeyBanc analyst’s fresh $1,400-plus price target for Alphabet is at the upper end of Wall Street expectations for shares, according to FactSet Research.

Alphabet’s second-quarter ad and “bread and butter” search revenues were “healthy and a good barometer of potential strength heading into the rest of 2018/2019,” noted Daniel Ives, head of technology research at GBH Insights, who kept his “highly attractive” rating and $1,300 price target.

In Alphabet’s favor were lower traffic acquisition costs (TAC), said Ives in a note to clients late Monday. (TAC refers to the chunk of advertising revenues paid out to third parties that drive traffic to a company’s websites or ads.) He added that investors will need to keep an eye on TAC trends in future, given the competitive environment Alphabet faces, with higher costs front and center.

“Overall, we believe ‘good enough’ 2Q earnings and guidance could be a positive catalyst for shares, with much fuel left in the growth tank in our opinion, although this will continue to be a battlefield stock over the coming months with the bulls/bears both hanging their hats on various metrics following this earnings report,” he said.

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