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Stock Analyst Update

Alphabet's Ad Revenue Growth Continues to Impress

Shares of the Google parent look undervalued as the firm continues to monetize its users and attract more ad dollars.

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 Alphabet (GOOG) (GOOGL) reported better-than-expected fourth-quarter revenue as the firm continues to grow its advertising business impressively. With GDPR, and data security and privacy issues surrounding the firm and its online advertising peers, Alphabet, similar to Facebook, continues to monetize its users and attract more ad dollars to not only its search but also its YouTube video platform. In our view, this demonstrates the firm’s strong network effect moat source. While Alphabet’s operating margin was in line with our internal projection, it was slightly below the consensus. We expect the firm to continue its investments in R&D in order to stay ahead when it comes to innovative tools not just for consumers, but also for advertisers and enterprises, further pressuring margins in 2019. We did not make significant changes to our projections and continue to value Alphabet at $1,300 per share. While the share price of this wide-moat name has increased over 9% year-to-date, the stock remains attractive at current levels. We note that in reaction to slightly mixed results, Alphabet shares were down nearly 3% in after-hours trading.

Alphabet posted total revenue of $39.3 billion, up nearly 22% year over year. Advertising revenue grew 20% to $32.6 billion as mobile search and YouTube continue to attract the ad dollars. Other revenue, which primarily consists of revenue from Google’s hardware products, its cloud offerings, and Google Play, came in at $6.5 billion, a 38% increase from last year. Waymo is not yet generating much revenue, but revenue from Fiber and Verily drove other bets revenue up 18% year over year to $154 million. While we continue to expect deceleration in ad revenue growth, we remain confident that search and YouTube ad sales, plus further growth in cloud and Google’s hardware offerings will drive total top-line growth at a 17% CAGR through 2023.

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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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