Google’s Wall Street Estimates Are Walked Back Because of Elevated Costs


Alphabet Inc. (GOOGL) , Google’s parent company, beat fourth-quarter earnings estimates and grew revenue solidly, but elevated costs have many analysts on Wall Street concerned about future profits. 

Alphabet shares fell as much as 3% after earnings were released after markets closed Monday, and were down 0.79% to $1,132.45 on Tuesday.  

Strong ad revenue from a higher number of clicks on ads propelled revenue to $39.3 billion, beating analysts’ estimates. Earnings per share were $12.77, beating estimates. But costs rose 26% and capital expenditures rose 64%, prompting many analysts to revise their price targets lower. 

At least nine sell-side analysts ratcheted down their price targets Tuesday. Others, however, were more encouraged than discouraged and boosted their targets. up. 

Credit Suisse

Analyst Stephen Ju lowered his price target to $1,400 from $1,450, which remains 23% above the stock’s current level.

“Our price target is now $1,400 as we increase our revenue, OpEx, and CapEx estimates,” Ju wrote in a note Tuesday. He said he thinks the heavily increased research and development spending won’t be recurring, but that capital expenditures may climb, impacting his free cash flow estimates. 

RBC Capital Markets

RBC’s Mark Mahaney dropped his price target to $1,300 from $1,400. He lowered his full-year 2019 operating income estimates by 7% to $34.1 billion, as “Other COGS {cost of goods sold} came in high due to content acquisitions costs and other costs primarily related to YouTube,” Mahaney wrote in a note.

He added that “Data Center costs and hardware related costs also contributed to 270bps margin deleverage year-over-year.”

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Still, “All in, Revenue fundies remain very consistent & robust,” he added, as Google’s slice of the advertising market, both for search engine optimization and its YouTube unit, remains strong. 

Barclays

Analyst Ross Sandler lowered his price target to $1,350 from $1,400, but also said revenue growth “remains stellar,” and acknowledged management’s message that headcount additions and capital expenditures will moderate throughout the year. Some of the capital expenditures were from new real estate. 

JPMorgan Chase & Co.

Analyst Douglas Anmuth lowered his price target to $1,250 from $1,270, pointing out that it’s now clear that Google sometimes struggles to meet bottom-line expectations in the fourth quarter. 

SunTrust 

Analyst Youssef Squali lowered his price target on Google to $1,350 from $1,450. 

MoffettNathanson

Analyst Michael Nathanson isn’t surprised at all by Google’s rising costs. Furthermore, he isn’t surprised or shaken at all by the tech behemoth’s decision to ramp up costs to invest in new businesses.

“About a year ago, right after 4Q 2017 earnings, we were struck by the realization that Alphabet’s continued investment in early stage growth businesses like Hardware, Cloud, and YouTube would dampen profit growth as the company prioritized revenue opportunities over margin protection,” Nathanson wrote in a note. He raised his priced target to $1,380 from $1,360, “based on 12.5x 2020E core Google segment GAAP EBITDA (unchanged multiple), as higher revenue growth brings up our 2020E GAAP EBITDA estimate by +1%.” 

Deutsche Bank 

Analyst Lloyd Walmsley raised his price target to $1,380 from $1,300. 

Alphabet is a holding in Jim Cramer’s Action Alerts PLUS member club . Want to be alerted before Jim Cramer buys or sells GOOGL? Learn more now

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