Alphabet Delivers Strong Quarter Despite YouTube Protests

Despite all doomsday predictions for Alphabet Inc GOOG GOOGL following the YouTube advertiser pullback controversy, the company turned in strong quarterly results.

Impressive Ad Strength

UBS analyst Eric Sheridan sees across-the-board strength in Google's first-quarter results, with core advertising business growing at 19 percent year-over-year, despite at a scale of $21.4 billion, driven by programmatic, Search and YouTube.

The analyst said Google's emerging growth areas such as AI/machine, learning, enterprise/cloud, media consumption, tech hardware, local advertising, self-driving vehicles and life sciences, which are still under-appreciated by most investors, also showed strength.

Sheridan also noted a disciplined approach to allocating capital as evidenced by lower "other bets" losses, better core operating margins and a strong balance sheet.

Positives/Negatives

UBS views the following as positives:

• Stronger-than-expected FX-neutral websites revenue growth of 23 percent versus its estimate of 20 growth, driven by continued momentum in mobile Search and YouTube.
• Higher than expected network revenues on the back of strong growth in programmatic and AdMob.
• Google "other" revenues came in above expectation, driven by strength in Play, hardware and Cloud.
• Stable Google segment GAAP operating margins against investor fear of forward investment curve.
• Enhanced geographic revenue disclosure.

The negatives outlined by UBS are as follows:

• Distribution and network TAC continue to uptick sequentially, given mobile and programmatic mix shifts.
• Lower-than-expected repurchases.
• Higher-than-expected effective tax rate despite lapping one-time discrete items in Q4.

Salmon's Take On Search, YouTube And Cloud

BMO Capital Markets analyst Daniel Salmon offered his view on the different businesses of Google.

Search: The analyst believes the most important issue for the stock near term remains the impact of the high-margin fourth mobile ad unit and the pace of rollout for promoted places on Maps. The analyst believes Amazon.com, Inc. AMZN's rise will be a slight headwind, but reiterated there are lots of verticals with little overlap.

YouTube: The analyst believes the YouTube protests will have limited near-term financial impact, although he thinks they will slightly weaken negotiating leverage for upfront commitments.

Cloud: "Cloud growth remains strong and we believe results were favorably impacted by good demand for Google Home," the analyst said. The analyst expects strong Google "other" growth in the second and third quarter but some moderation in the fourth quarter, as it laps the year-ago quarter's 62 percent growth.

Estimate Changes

UBS raised its second-quarter net revenue estimate to $20.84 billion from $20.54 billion and GAAP EBITDA estimate to $8.63 billion from $8.42 billion but maintained its GAAP earnings per share estimate at $8.28.

The firm also raised its 2017 net revenue estimate to $87.45 billion from $86.13 billion and GAAP EBITDA estimate to $35.30 billion from $34.86 billion but lowered its GAAP earnings per share estimate to $33.85 from $34.26.

Rating/Price Target

UBS reiterated its Buy rating on the shares of the company, while it lifted its price target to $1,050 from $980.

"We continue to recommend Alphabet as a key holding in US Internet," UBS said.

Meanwhile, BMO Capital Market continues to see solid revenue trends driven by key ad load growth initiatives such as fourth search unit and promoted places on Maps, TV budgets' shifting to YouTube and the continued emergence of non-advertising revenues like Cloud, which management reiterated as a top investment priority.

"This should underpin a 'grind it out' story, but we continue to see more upside in AMZN," the firm said.

BMO Capital Markets continues to rate Google a Market Perform, but raised its price target to $970.

At the time of writing, Google shares were up 4.86 percent at $934.72.

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