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Stock Analyst Update

Another Strong Quarter for Alphabet

We view shares as fairly valued today, and are raising our fair value estimate.


 Alphabet (GOOG) handily beat our third-quarter 2017 top- and bottom-line expectations as YouTube and cloud drove strong double-digit growth in advertising and other revenue, respectively. While cost-per-click continued its decline, it was more than offset by growth in ad engagements, or paid clicks, which demonstrates the firm’s strong network effect benefiting both users and advertisers. On the cloud front, investments made by Google are bearing fruit as growth in cloud is helping Alphabet make further headway toward revenue diversification. We remain confident the firm can maintain and utilize its network effect and data (intangible asset) moat sources to remain one of the main players not only in digital advertising but also in cloud. Alphabet’s better-than-expected third-quarter performance prompted us to increase our projections for 2017 and the remainder of our explicit forecast period, as we raise our fair value estimate to $1,100 per share from $1030. Alphabet shares have rallied 3% in after-hours and remain in 3-star territory. We recommend a wider margin of safety before allocating capital toward this wide-moat and high uncertainty-rated name.

Alphabet generated $27.8 billion in total revenue, equivalent to a 24% year-over-year growth, in the third quarter. Google’s advertising revenue, grew 21% year over year to $24.1 billion, which represented 87% of total revenue. Our positive takeaway from Google’s ad numbers is that different forms of engagement or interaction with Google’s ad inventory sold are increasing, indicated by the 6% sequential growth and the 47% year-over-year growth in paid clicks during the quarter. However, cost-per-click remains depressed (18% year over year during the quarter), although it rose sequentially.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.