Pacific Crest recommends buying Alphabet Inc. (NASDAQ:GOOGL). Conversations with advertisers reinforce our confidence in search advertising and ease concerns around YouTube. Pacific Crest expects continued strong growth in the core Google business and view Alphabet as very attractively valued at current levels.
Pacific Crest expects Q1 revenue to be essentially in line with consensus of $19.8 billion, with relatively stable growth in net ad revenue of 17% y/y. Pacific Crest expects continued cost management to drive Q1 EBITDA and GAAP EPS to $9.9 billion and $7.74, which would be slightly ahead of consensus estimates of $9.8 billion and $7.40.
Conversations with advertisers and technology partners in Q1 suggested search remains very strong with ROI that remains among the best available. Despite the public pullback by some major brands from YouTube, feedback from advertisers remained very positive, and Pacific Crest would not expect the controversy to meaningfully affect results in the quarter or for the year.
Attendance and commentary exiting Google Cloud Next suggested rapidly growing interest in Google Cloud Platform among enterprise customers. Our proprietary checks reinforce this, as Google appears to have picked up as many new Fortune 2000 customer wins in Q1 as it did in 2H16.
Pacific Crest believes Google's core advertising business remains strong, see cost management as an ongoing opportunity for upside, and believe cloud, hardware and YouTube/YouTube TV provide sustainable extensions to revenue growth. Our price target remains $1,040 based on ~16x 2017E EV/Google EBITDA.