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Stock Analyst Update

Alphabet's Q2 Beats Expectations; FVE to $1,690

Cloud partially offsets ad revenue decline.

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Strong performances by Alphabet’s YouTube, cloud, and Google Play helped partially offset a decline in search ad revenue and resulted in second-quarter numbers above our expectations and the FactSet consensus. The firm has begun to see slight month-over-month improvement in search ad spending, although the business remains heavily dependent on an economic recovery. We continue to expect slight improvement in Google’s total ad revenue during the remainder of 2020 as the decline in search slows a bit and demand for direct-response ads continue to increase for YouTube. Google’s other segment is likely to continue to grow strongly this year, further diversifying Alphabet’s total revenue. Given the better-than-expected top- and bottom-line results in the second quarter and our assumption that Google will successfully monetize some of its other properties in the long run, we have increased our projections, resulting in a $1,690 fair value estimate, up from $1,520. This wide-moat and high-uncertainty name appears fairly valued, but we would not hesitate to accumulate shares during a pullback.

Alphabet reported total revenue of $38.3 billion in the second quarter, down nearly 2% from last year due to an 8% decline in ad revenue. Its search ad revenue dipped 10% from last year to $21.3 billion as ad spending in the travel and hospitality verticals continued to be slashed. Improvement in search revenue during the second half of the year is likely, as management said there are some early indications of changes in user behavior on search. For example, searches conducted for commercial products are increasing, which could attract more advertisers or could push ads purchased per advertiser higher. In addition, the decline in prices could attract some brand ad buyers. We also expect some of the ad dollars from the Facebook boycott to be spent on Google’s search or YouTube.

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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.