BMO Stays Neutral On Alphabet After Q1 Print: 'Solid' Top-Line, 'Weak' Margins

Alphabet Inc GOOG GOOGL's story exiting its first-quarter report on Monday is the same as it was heading into the print, according to BMO Capital Markets.

The Analyst

BMO's Daniel Salmon maintains a Market Perform rating on Alphabet's stock with an unchanged $1,100 price target.

The Thesis

Alphabet's Q1 report came in as expected and was highlighted by a "solid" top-line with "weak" margins, Salmon said in a research report. (See the analyst's track record here.)

This ongoing theme is now "increasingly embedded" in investor expectations moving forward, and could continue to be the case in the near-term unless the company introduces a "notable new story" such as monetizing Google Maps or the commercialization of Waymo, Salmon said.

Mobile search continues to be a "strong contributor," but it is also driving higher the company's traffic acquisition cost rate, which rose 280 basis points from a year ago, the analyst said.

YouTube's results continue to be solid, but ongoing initiatives to clean up its platform — such as removing inappropriate content — shouldn't impact top-line numbers but could be a drag on margins, according to BMO.

Alphabet's ongoing investments in its "other" business line should help support revenue growth, but this will likely pressure the company's margins as well, Salmon said. Alphabet continues to face a "long-term variable" in the growth of Amazon.com, Inc. AMZN's ambitions to boost its own ad business, which could threaten Alphabet's ad segment, he said.