Alphabet (GOOGL) Stock Falls as YouTube Slip Fuels Mixed Results, Analysts Lower Price Targets and Reflect on What Drove the Miss

Shares of Alphabet (NASDAQ: GOOGL) are down more than 3% in premarket trading Wednesday after the technology giant's Q1 report missed expectations across the board.

The owner of Google reported a Q1 EPS of $24.62, short of the consensus estimates of $25.91 per share. Revenue came in at $68.01 billion, up 23% from the year-ago period, but below the estimated $68.11 billion, according to Refinitiv.

YouTube advertising revenue stood at $6.87 billion in the period, well below the analyst expectations of $7.51 billion. Google Cloud segment generated $5.82 billion in revenue, topping the estimated $5.76 billion.

Alphabet reported traffic acquisition costs (TAC) of $11.99 billion, compared to the expected $11.69 billion. Advertising revenue came in at $54.66 billion in the quarter, compared to $44.68 billion in the year-ago period.

YouTube reported particularly poor results in the first quarter, after seeing rapid growth following the coronavirus pandemic which forced users to stay at home and spend more time on their devices.

In contrast, YouTube's rival TikTok had a particularly strong quarter, grabbing a greater share of the social media video market. YouTube’s timid growth was mostly in direct response adds, according to Alphabet CFO Ruth Porat.

Google’s cloud unit showed the strongest results in the period, recording a 44% growth as more enterprise clients move their workloads to the cloud. But the division is still losing money, the report showed, with an operating loss of $931 million, down from $974 million in the same period last year.

Morgan Stanley analyst Brian Nowak lowered the price target to $3,270.00 from $3,450.00 to reflect lower 2023 EBITDA estimates by roughly 3%.

The analyst saw two key reasons behind a weaker-than-expected print: 1) Weaker search driven by slower e-commerce, and 2) YouTube facing micro and macro headwinds.

“GOOGL’s weaker than expected paid search growth (vs us) likely speaks to weaker than expected e-commerce growth. Given the high and rising importance of e-commerce to driving the online ad markets we continue to believe the relationship between e-commerce and online advertising is important to watch,” Nowak said in a client note.

BofA analyst Justin Post also lowered the price target to $2,940.00 from $3,173.00 after “mixed” results reflected a more difficult environment and tough comps.

“We expect more mixed trends in 2022 as search growth slows and hiring/opex increases. However, vs peers, Alphabet has a more stable business, artificial intelligence (AI)/ machine learning (ML) advantages across the product stack (Performance Max a positive), significant expense flexibility, a mgmt team doing more for shareholders under new CEO (ie buybacks) and potential valuation support,” Post said.

The analyst noted still “attractive” valuation for Alphabet, especially in relation to S&P 500.

By Senad Karaahmetovic

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