'Difficult Environment And Tough Comps': Google Analysts React To Disappointing Earnings Report

Alphabet Inc GOOG GOOGL shares traded lower by 3% on Wednesday after the tech giant reported an earnings miss and disappointed the market with its YouTube numbers.

On Tuesday, Alphabet reported first-quarter adjusted EPS of $24.62 on revenue of $68.01 billion. Both numbers fell short of consensus analyst estimates of $25.91 and $68.11 billion, respectively. Revenue was up 23% from a year ago.

YouTube advertising revenue was particularly soft at $6.87 billion compared to analyst estimates of $7.51 billion. Google Cloud revenue of $5.82 billion exceeded analyst estimates of $5.76 billion.

Traffic acquisition costs were $11.99 billion in the quarter, higher than the $11.69 billion analysts had anticipated.

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Difficult Comps: Bank of America analyst Justin Post said Alphabet's margins were a bright spot in a quarter in which it faced a "difficult environment and tough comps."

"We think key drivers for the stock (revenue trends, y/y core margin trends, use of capital, and disclosures) were mixed/negative in 1Q, though this was expected on difficult
Comps," Post wrote.

JMP analyst Andrew Boone said Alphabet's Google Search business was solid, but YouTube was negatively impacted by macro events.

"Stepping back, we continue to view Alphabet as well positioned across most major digital secular growth trends as its more verticalized search offering likely improves ROI for retail and travel advertisers (with more verticals to come), 2B+ logged in users come to YouTube monthly, and GCP remains well positioned in the cloud market," Boone wrote.

Transitory Headwinds: Wells Fargo analyst Brian Fitzgerald said Alphabet's YouTube headwinds are likely transitory, and Google Play trends should improve by the third quarter.

"We're encouraged by continued strength in what we view as GOOGL's two most important franchises, Search and Cloud," Fitzgerald wrote.

KeyBanc analyst Justin Patterson said he was anticipating that Alphabet would face European and forex headwinds in the first quarter.

"Against that lens, Search's resilience (+25% y/y, ~4% upside) screens as a positive that more than offsets the incremental bear narrative around YouTube (e.g., is the slowdown comps and macro or is it TikTok?)," Patterson wrote.

Morgan Stanley analyst Brian Nowak said Alphabet's weaker search revenue was likely driven by slowing growth in e-commerce, which could have negative implications for Amazon.com, Inc. AMZN and other online retailers.

"We also note that ~$12.6bn of Google 'other' revenue was ~10% lower than expected due to changes in GOOGL's Play pricing model (a pivot toward fees of 15% or less)," Nowak said.

Ratings And Price Targets:

• Bank of America has a Buy rating and $2,940 target.
• Wells Fargo has an Overweight rating and $3,400 target.
• JMP has a Market Outperform rating and $3,300 target.
• KeyBanc has an Overweight rating and $3,075 target.
• Morgan Stanley has an Overweight rating and $3,270 target.