Alphabet Slips As Street Digests Revenue Miss, Surprise Disclosures
Class A shares of Alphabet (GOOGL) are under pressure on Tuesday after the company reported better than expected earnings per share but revenue for the fourth quarter that fell short of consensus estimates. Google's parent also broke out numbers for its YouTube and cloud businesses for the first time. Following the news, several Wall Street analysts raised their price targets for Alphabet, with RBC Capital analyst Mark Mahaney calling the results a "high-quality miss."
RESULTS: Aftermarket close on Monday, Alphabet reported fourth-quarter earnings per share of $15.35 and revenue of $46.08B, with consensus at $12.53 and $46.94B, respectively. The company also reported fourth-quarter properties revenues $31.9B versus $26.9B a year ago, Google Cloud revenue of $2.61B versus $1.71B in the same period of the prior year, YouTube ads revenue of $4.72B versus $3.61B in same quarter of last year, Other Bets revenue of $172M versus $154M a year ago, and an Other Bets operating loss of ($2.03B) compared to ($1.33B) a year ago.
"In 2019 we again delivered strong revenue growth, with revenues of $162B, up 18% year over year and up 20% on a constant currency basis," said Ruth Porat, Chief Financial Officer of Alphabet and Google. "To provide further insight into our business and the opportunities ahead, we're now disclosing our revenue on a more granular basis, including for Search, YouTube ads and Cloud."
'HIGH-QUALITY MISS': In a post-earnings research note to investors, Needham analyst Laura Martin raised her price target for Alphabet to $1,800 from $1,350, while keeping a Buy rating on the shares. The analyst noted that while the quarter was "mixed," she is positive on the added "revenue granularity" of its segments, which suggests that the company may be more in-tune to "external constituencies."
Pivotal Research analyst Michael Levine also raised his price target for Alphabet to $1,700 from $1,650, while maintaining a Buy rating on the shares. The analyst pointed out that the company reported a slightly weaker revenue quarter versus expectations, though based on management commentary, U.S. results appear to have been weighed down by a challenging hardware comp, which is “largely irrelevant” to the story. On a "far more" positive note, Alphabet provided incremental segment revenue disclosure, specifically around search, YouTube and Cloud, the analyst added.
Calling the fourth-quarter results a "high-quality miss," RBC Capital analyst Mark Mahaney raised his price target on Alphabet to $1,550 from $1,500 and kept his Outperform rating. Also maintaining an Overweight rating on the shares, Piper Sandler analyst Michael Olson raised his price target for Alphabet to $1,600 from $1,500. The analyst highlighted that the core advertising business is decelerating, while cloud is accelerating and YouTube growth is outpacing the core.
Meanwhile, his peer at Guggenheim raised his price target on Alphabet shares to $1,580 from $1,460. Analyst Michael Morris noted that Alphabet's fourth-quarter revenue of $46.1B was "modestly below" his $47.0B estimate and the consensus forecast of $46.9B, which he sees adding to broader concerns that expectations for digital ad growth are too high. He believes Alphabet needs growth drivers beyond core Google Search advertising to drive renewed investor enthusiasm, but also believes the company's broad portfolio, including YouTube and Cloud, provide a basis for confidence. He has a Buy rating on both classes of the stock.
Nomura Instinet, JMP Securities, and JPMorgan also increased their price targets for Alphabet, while keeping Buy-equivalent ratings on the name.
YOUTUBE SMALLER THAN EXPECTED: While Oppenheimer analyst Jason Helfstein raised his price target for Alphabet to $1,620 from $1,530, he noted that Search is slowing, YouTube was smaller than expected, and there was no change in the Other Bets outlook. Helfstein has an Outperform rating on the shares.
Highlighting that Alphabet's new segment disclosure reveals that global search revenue was about 6% larger than expected in 2019, Morgan Stanley analyst Brian Nowak pointed out that YouTube's $15B of 2019 revenue was about 30% smaller than he expected, though the segment is growing about 300 basis points faster year-over-year than he estimated. Google Cloud "is what we thought it was," with $9B of annual revenue and 50% year-over-year growth, he added. The analyst acknowledged that the new segment disclosure gives better insight into the company's main growth drivers, but argued that his thesis remains that Alphabet's ability to innovate and drive engagement across its nine products with 1B plus users are key to driving long-term value. Nowak kept an Overweight rating on Alphabet with a $1,560 price target on the shares.
WEAKNESS TO BE 'SHORT LIVED': Commenting on Alphabet's mixed fourth-quarter results, Canaccord analyst Maria Ripps said she thinks the current valuation is reasonable and expects any weakness in the shares to be short-lived. Ripps reiterated a Buy rating and $1,600 price target on Alphabet shares. Meanwhile, her peer at Jefferies called Alphabet's new disclosures for YouTube ads and Google Cloud a "positive surprise” and added that the stock’s valuation looks attractive with its price down following quarterly results. Analyst Brent Thill has a Buy rating and $1,650 price target on Alphabet shares.
PRICE ACTION: In morning trading, Class A shares of Alphabet have dropped about 4% to $1,427.14.
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