Alphabet Inc. (NASDAQ:GOOGL) Q2 EPS report painted a picture of two stories – 1) an ad business that continues to scale and surprise in its sustained rate of revs growth (driven by mobile search & YouTube) & 2) a cost structure that is in evolution (traffic costs put downward pressure on net revs growth due to mobile search shifts & bias to invest for the medium/long term behind key initiatives in cloud/personal computing).
In light of this most recent earnings report, UBS still hold firm in its constructive LT view of Alphabet – strengths/advantages with respect to AI/machine learning and mobile app ecosystem usage will likely result in Alphabet playing a key role in the next league of personal/enterprise computing trends over the foreseeable future. UBS continues to recommend Alphabet as a core holding & raise our PT from $1,050 to $1,080.
Positives in the qtr: a) Stronger than expected FX-neutral Websites revs growth of +22% YoY (vs. UBSe of +19% YoY) driven by continued momentum in mobile search & YouTube; b) Higher than expected Network revs (+14% YoY vs. UBSe of +6% YoY) on the back of strong growth in programmatic & AdMob; c) Cloud continues to gain traction, especially with Enterprise customers (# of new deals closed for more than $500k is 3x vs. PY); d) Healthy YouTube consumption trends with 60 mins daily avg time spent (on mobile & tablet) and YT watch time on TV screens nearly double YoY.
Negatives in the qtr: a) Distribution and network TAC (as % of revs) continue to uptick YoY and QoQ given mobile & programmatic mix shifts; b) Google segment GAAP operating margins decline YoY (-259bps) and QoQ (-48bps), mostly impacted by SBC (albeit 2H SBC trajectory now more muted due to refresh timing shift); & c) EPS beat primarily driven by lower than expected effective tax rate (19% vs. UBSe of 32%).
UBS new Q3 '17 ests are net revs $21.7b (from $21.5b); GAAP EBITDA $8.7b (unchanged), GAAP EPS $8.20 (from $8.28). UBS new FY'17 ests are net revs $88.0b (from $87.5b); GAAP EBITDA $32.5b (from $32.6b), GAAP EPS $30.47 (from $29.95). Reiterate Buy Rating & Raise PT to $1,080 (from $1,050). UBS PT is based on an equal blend of EV/GAAP EBITDA & EV/(FCF-SBC) multiples.