Alphabet drops most in three years after first quarter but analysts upbeat
Ruth Porat couldn't have been clearer: Alphabet Inc's chief financial officer said on Thursday that Google's parent needed to step up investment to boost traffic.Analysts agreed. Investors weren't so sure.The company's shares closed down 5.46 percent at $737.42 on Friday, their biggest one-day percentage drop since October 2012.The search giant's first-quarter earnings fell short of estimates, largely because it spent more to build traffic for its mobile advertising services.Analysts, though, focused on the 20 percent rise in revenue from Google's websites, a key metric that met most expectations."When the misses are more headline than real. And fundamental trends are intrinsically impressive. And valuation looks compelling. Then that's when you buy," RBC Capital Markets analyst Mark Mahaney said in a client note.Susquehanna Financial Group analysts agreed. "While headline numbers missed, the key revenue number was fine," they wrote.
Several brokerages, including Susquehanna, cut their price targets on Alphabet, but maintained "buy" recommendations.RBC maintained its $1,000 price target.The same drivers that are helping Alphabet's revenue growth - mobile, buying and selling of automated ads and YouTube - are bringing with them slightly higher costs that could continue in the short term, Canaccord Genuity analysts wrote in a note.Alphabet said traffic acquisition costs totaled $3.8 billion and accounted for 21 percent of ad revenue in the first quarter, reflecting the ongoing shift to mobile and the growing importance of automated, or "programmatic", advertising.
At its core, Mahaney said, Alphabet is largely an advertising company and the strength of this business continued to show in the quarter, with a high rate of absolute growth - "no small feat on a nearly $70 billion ad business."Google's ad revenue rose 16.2 percent to $18.02 billion in the quarter while the number of ads jumped 29 percent."We feel this was a solid quarter, but the 'least good' of the past five, each one of which took the stock higher," Canaccord analysts said.
At least 11 brokerages cut their price targets on the stock, by as much as $80, but none downgraded the stock.Macquarie and Deutsche Bank raised their price targets by $20 - Deutsche Bank to $1,100 and Macquarie to $890.Of the 51 analysts covering the stock, 48 rate it "buy" or higher and three have a "hold". No one recommends selling.Up to Thursday's close, Alphabet's shares had risen 42 percent in the past year. (Reporting by Supantha Mukherjee and Tenzin Pema in Bengaluru; Editing by Ted Kerr)