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Stock Analyst Update

Ad, Cloud Growth Strengthen Google's Revenue

Margin pressures persist, and we view shares as fairly valued today.

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 Alphabet (GOOGL) (GOOG) beat expectations on the top and bottom line. Strength in Google’s advertising, cloud, and hardware offerings helped accelerate overall revenue growth from a year ago. In our view, Alphabet’s network effect and data economic moat sources continue to drive growth in the size and overall usage of Google’s ecosystem which help the firm remain the behemoth in online advertising and gain further traction in enterprise cloud. While the better-than-expected first-quarter revenue helped beat expectations on the bottom line, we note that the growing traffic acquisition costs plus further investments in data centers and content acquisitions, continue to push gross margin lower, as we expected. Our fair value estimate of $1,200 is intact as our higher revenue forecast was offset by a slightly lower margin assumption for 2018 and beyond. While Alphabet shares are trading in 3-star territory, we recommend investing in this wide-moat and high uncertainty rated name on any pullback.

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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.

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