Alphabet beats expectations; maintaining fair value

Google’s first-quarter results were helped by strong ad spending in January and February, but followed by the pandemic-driven reversal in March

Ali Mogharabi 29 April, 2020 | 9:27AM
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Alphabet’s (GOOGL) first-quarter results beat the FactSet consensus on revenue and EBIT, helped by strong ad spending in January and February, but followed by the pandemic-driven reversal in March. Revenue diversification is paying off as solid growth in YouTube and cloud lessened the coronavirus impact on overall revenue.

We continue to expect the current downturn to strengthen Alphabet’s network effect moat source as more users remain on Google’s platforms, from which the firm will benefit once the economy turns around. We also applaud the various steps that Alphabet is taking to control costs and improve efficiency during this downturn. The firm mentioned that in April, it has also begun seeing slight changes in user behavior, possibly tilting slightly back to more consumption, which we think may help ad revenue. However, there’s a lot of uncertainty about whether such change will continue throughout the second quarter and/or the rest of 2020. In addition, advertisers are likely to remain hesitant and reduce ad spending until they see indications of an economic turnaround. We have not made significant adjustments to our projections and are maintaining our US$1,400 per share fair value estimate. Alphabet remains on our Best Idea list.

Alphabet reported total revenue of US$41.2 billion, up 13% year over year, helped by growth in advertising (10%) and cloud (52%). While Google’s search ad revenue increased 9% during the quarter, double-digit growth during the first two months came to a grinding halt and began to decline at mid-teens rate in March. The good news was that usage of Google search increased dramatically. However, monetization of traffic declined as user’s intentions likely no longer included various types of consumption, especially travel, which has been the hardest hit vertical. While it is early, management did state that user intention may be very slowly changing back to consumption.

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Ali Mogharabi

Ali Mogharabi  Ali Mogharabi is a senior equity analyst for Morningstar.

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