Google: Good 2Q18 Operating Results - Pivotal Research

Alphabet reported 2Q18 growth of 26 similar to our forecast and ahead of StreetAccount consensus of 26 EPS was well ahead of our expectations and those of consensus at 1175 excluding this year39s multibilliondollar European Commission fineAlphabet reported constant currency growth of 23 for 2Q18 similar to growth observed in almost every quarter since 4Q15 Beyond ongoing market share gains in digital advertising we think that relatively easy comparables because of last year39s YouTube advertiser boycott and incremental revenue from GDPR probably helped as well quotOtherquot revenues 14 of the company39s total including Cloud Play and Hardware collectively outperformed the company39s overall growth rate with 37 growth yearoveryear We also think that ongoing shifts of search spending away from the network and towards the core site probably helped the reported quotsitesquot line while programmatic advertising undoubtedly grew substantially beyond the reported Network growth rate of 14 There do not appear to be any signs that should cause a meaningful slowdown any time soon as fines from the EC are not likely to hamper Alphabet39s growth rate Conversely regulatory changes such as GDPR in Europe and similar laws implemented elsewhere could have the effect of reinforcing Alphabet39s growth going forward unless regulators choose to more aggressively attack Alphabet39s market codominance which they may very well do at some point in the future By region growth was skewed away from the US and EMEA as APAC and Other Americas both grew by around 34 on a constant currency basis similar to 1Q18 for Other Americas but much faster for APAC Operating income was also aided by 14bn or 2share of other income most of which was due to gains on equity securitiesOn the cost side TAC related to distribution was favorable decelerating for the first time since early 2015 although it still rose 47 TAC to network members also decelerated significantly to a 12 growth rate because of what the company described nonspecifically as a favorable mix shift within its programmatic business Operating costs as a percentage of revenues on an exTAC basis were down markedly from 328 in 2Q17 to 300 this quarter Taxes were higher than in recent periods at 24 of net income although this is in part because the latest fine from EC was not tax deductibleBeyond the operating results we thought it notable that capital expenditures were up significantly nearly doubling yearoveryear to 55bn equivalent to 17 of the company39s gross revenue following an expenditure equal to 23 of its gross revenue in 1Q18 The company is on track to spend a greater share of its revenue on capex than in any year since 2014 at its current pace To the extent that these efforts reinforce the company39s longterm competitive position they can be viewed positively but on the other hand we think much of the investment is reinforcing businesses in global markets which probably aren39t particularly large or profitable any time soonOn balance we view the quarter favorably for the company and raise our price target from 1050 to 1080 on a YE2018 basisVALUATION We value Alphabet on a DCF basis Our valuation incorporates a longterm 55 growth rate a shortterm 83 discount rate and a 113 longterm discount rate Our price target on Alphabet is now 1080 and we continue to rate the stock HoldRISKS Core risks for web publishers relate to 1 high degree of rivalry in lieu of barriers preventing competition from emerging 2 high and increasing capital needs to remain and 3 government regulations and consumer pushback related to data management and privacyFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE GOOGL 72418pdfThe opinions and points of view expressed in this content are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated writers amp160amp160

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Google: Good 2Q18 Operating Results - Pivotal Research

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Brian Wieser

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Google: Good 2Q18 Operating Results - Pivotal Research

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