Alphabet Beats Expectations; Maintaining Fair Value
Alphabet’s first-quarter results beat the FactSet consensus on revenue and EBIT, helped by strong ad spending in January and February, but followed by the pandemic-driven reversal in March.
Alphabet’s (GOOGL) first-quarter results beat the FactSet consensus on revenue and EBIT, helped by strong ad spending in January and February, but followed by the pandemic-driven reversal in March. Revenue diversification is paying off as solid growth in YouTube and cloud lessened the coronavirus impact on overall revenue. We continue to expect the current downturn to strengthen Alphabet’s (GOOG) network effect moat source as more users remain on Google’s platforms, from which the firm will benefit once the economy turns around. We also applaud the various steps that Alphabet is taking to control costs and improve efficiency during this downturn. The firm mentioned that in April, it has also begun seeing slight changes in user behavior, possibly tilting slightly back to more consumption, which we think may help ad revenue. However, there’s a lot of uncertainty about whether such change will continue throughout the second quarter and/or the rest of 2020. In addition, advertisers are likely to remain hesitant and reduce ad spending until they see indications of an economic turnaround. We have not made significant adjustments to our projections and are maintaining our $1,400 per share fair value estimate. Alphabet remains on our Best Idea list.
Alphabet reported total revenue of $41.2 billion, up 13% year over year, helped by growth in advertising (10%) and cloud (52%). While Google’s search ad revenue increased 9% during the quarter, double-digit growth during the first two months came to a grinding halt and began to decline at midteens rate in March. The good news was that usage of Google search increased dramatically. However, monetization of traffic declined as user’s intentions likely no longer included various types of consumption, especially travel, which has been the hardest hit vertical. While it is early, management did state that user intention may be very slowly changing back to consumption.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Ali Mogharabi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.