Alphabet (GOOG) (GOOGL) reported strong first quarter results with top and bottom line coming in easily ahead of the FactSet consensus estimates. Continuing strength in ad revenue due to the economic recovery, which drives more brand ad spending, and higher direct-response ad spending drove growth higher. The strong ad business was combined with the firm’s successful revenue diversification as the cloud segment is benefiting from digital transformation and wider adoption of cloud by businesses of all sizes. While we expect some deceleration in direct-response ad revenue in the second half of this year, we remain confident that acceleration in brand ad spending, which increases YouTube monetization, and continuing strength in cloud will offset this headwind. In addition, with increasing outdoor activities and travel by consumers, monetization of Google Maps could further strengthen the firm’s revenue growth.
We have slightly increased our revenue projections and widened our margin assumptions, resulting in a $2,925 Alphabet fair value estimate, above $2,605 previously. While Alphabet benefited from higher online ad spending during the pandemic, we expect the firm to perform well in the recovery as well. Plus, it is trading at more than a 20% discount to our fair value estimate. The stock does face risks such as data privacy and antitrust issues, along with possibly an 8%-11% negative impact from a possible increase in the federal statutory tax rate, along with higher rates on global intangible low-taxed income, and possibly the elimination of the foreign-derived intangible income deduction. Despite these risks we remain confident in the firm’s ability to maintain its wide-moat rating and strong growth.
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