Alphabet Missed Q2 Expectations, but Cloud Growth Impressive and Advertising Intact; FVE to $169

While Alphabet’s second-quarter results missed FactSet consensus estimates, we found the firm’s search advertising and cloud numbers encouraging. Google’s diversified advertising offerings appear to be partially offsetting uncertainties in the macro environment, while digital transformation to cloud remains on top of many businesses’ priority list. We have slightly lowered our short- and medium-term expectations given the ongoing economic and geopolitical challenges, resulting in a $169 fair value estimate for Alphabet, down from $180. While the firm is taking steps to control costs at least through this year, with a strong cash-generating advertising business, progress toward profitability within its cloud segment, and a strong balance sheet, we think Alphabet is well-positioned to allocate more capital toward tuck-in acquisitions and investments.