The Street Debates Alphabet's Q3: Buy The Dip Or Sell Into Weakness?

Alphabet Inc GOOG GOOGL reported Thursday its third-quarter results, which resulted in an immediate 5 percent sell-off.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• BMO Capital Markets' Daniel Salmon maintains a Market Perform rating on Alphabet with an unchanged $1,150 price target.
• Bank of America's Justin Post maintains at Buy, price target lowered from $1,390 to $1,350.
• Canaccord Genuity's Michael Graham maintains at Hold, price target lowered from $1,170 to $1,140.
• Pivotal Research Group's Brian Wieser maintains at Hold, unchanged $1,010 price target.
• Raymond James' Aaron Kessler maintains at Outperform, price target lowered from $1,405 to $1,300.
• Jefferies' Brent Thill maintains at Buy, unchanged $1,450 price target.
• KeyBanc Capital Markets' Andy Hargreaves maintains at Overweight, unchanged $1,430 price target.

At time of publication, GOOGL traded around $1,090.75 per share.

BMO: Solid Report

Alphabet's third quarter was "solid" and reinforces the stock's status as a core holding, Salmon said in a research report. Specifically, revenue growth in the quarter was impressive despite a slight deceleration and the momentum could continue as the company moves to monetize new properties like Maps.

The Street's expectations for 20 basis points of margin expansion in both 2019 and 2020 is too aggressive due to a mix shift towards YouTube, Hardware and Cloud, which experienced higher costs of revenue in the quarter.

BofA: Trading At A Discount

Despite a slight miss, Alphabet's core ad business remains healthy, Post said in a research report. Margins were lower in the quarter due to higher cost of goods sold (data centers and YouTube content), but margins should improve moving forward due to a "constructive" view on the business segments.

After falling around 5 percent, shares were trading at 23 times GAAP EPS and 12 times core Google (advertising, Play) which represents a discount to the consumer discretionary sector.

See Also: Gene Munster's 6 Takeaways From Alphabet's Q3

Canaccord Genuity: 3 Concerns

Investors should sit on the sidelines for three reasons, Graham said in a research report.

• The sustainability of strength in desktop search seen in the quarter is questionable.
• Higher hardware sales and YouTube content is likely to pressure fourth quarter margins.
• The stock multiple is high based on its history.

Pivotal: Mixed Quarter

Alphabet's mixed quarter was highlighted by a sustainable revenue and profit growth, which is partially offset by higher than expected capital expenditures, Wieser said in a note. The company appears to be on track to spend more as a percentage of total revenue on capex than in any year since 2014.

While investments in the business seems prudent, it's likely most of the investments will be in business segments that aren't large or expected to show a profit in the near term.

Raymond James: Positives And Negatives

Alphabet's report was highlighted by two positive readouts and two negatives, Kessler said in a note.

On the positive front:

• Total traffic acquisition costs (TAC) to partners rose a modest 18 basis points from the prior quarter.
• International growth was encouraging, especially in Europe despite GDPR headwinds.

The negatives include:

• Deceleration in licensing and Other revenue.
• A slight miss in the Google Properties.

Overall a bullish stance on the stock remains justified amid continued momentum in advertising growth, increasing traction in the cloud business while the stock is trading at an attractive multiple of 18 times 2019 core EPS (excluding cash).

Jefferies: 3 Notable Developments

Alphabet's shows a "remarkably stable" revenue growth (excluding foreign exchange) as net revenue remains on path to hit $100 billion in the year, Thill said in a note. During the quarter there were three notable takeaways:

• Waymo exceeding 10 million miles of autonomous driving testing.
• Acceleration in paid clicks on Google from 58 percent in the second quarter to 62 percent.
• Cloud was a leading contributor to growth ahead of Google Play.

KeyBanc: 'Remarkable' Stability

Exiting the earnings release, the advertising business has now grown by at least 15 percent in 33 of the past 36 quarters, Hargreaves said in a note. Not only does this show "remarkable" stability in the core business, it continues to occur against a large base. Coupled with other opportunities in more mature and new business lines, the stock looks undervalued at its current valuation of 12.3 times 2019 EV/Google EBITDA.