Alphabet Fully Valued After Another Strong Quarter

Alphabet reported second-quarter results last night with revenue and earnings coming in above both our expectations and the consensus. The firm remains at the top of the digital advertising world with ad revenue continuing its double-digit growth.

Alphabet is also progressing toward diversification as seen by growth from the firm's cloud offering. However, continuing increases in traffic acquisition costs, along with decline in cost-per-click, remain a concern. We slightly upped our revenue estimates in our model, but that did not have an impact on our fair value estimate.

Google's gross advertising grew 18% year over year, helped by the continuing momentum of the digital ad transition onto mobile devices, which has lasted longer than we expected. YouTube has also boosted results as the online video ad market has grown. We think YouTube is an obvious beneficiary of this trend as its bumper ads are shorter and are more likely to be endured by content viewers.

While the firm's shares are trading down a bit, they remain in 3-star territory, and we recommend a wider margin of safety before investing in this wide-moat name.