Alphabet CFO Ruth Porat
Photograph by Jin Lee — Bloomberg/Getty Images

The same drivers helping Alphabet's revenue growth are bringing with them slightly higher costs.

By Reuters
April 22, 2016

Ruth Porat couldn’t have been clearer: Alphabet’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.

Alphabet’s shares fell 4.3% to $747.36 in early trading on Friday after the company’s earnings fell short of estimates, largely because it spent more to build traffic for its mobile advertising services.

Analysts, though, focused on the 20% rise in revenue from Google’s websites, a key metric that met most expectations.

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“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% of ad revenue in the first quarter, reflecting the ongoing shift to mobile and the growing importance of automated, or “programmatic,” advertising.

Read More: Alphabet Earnings: Asked and Unanswered

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% to $18.02 billion in the quarter while the number of ads jumped 29%.

“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% in the past year.

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