Alphabet Inc Stock Selloff Overdone: Morgan Stanley

Alphabet Inc Stock Selloff Overdone: Morgan Stanley

Alphabet stock rallied on Tuesday along with a good chunk of the rest of the market following the two-day uproar caused by the Brexit vote. Google’s parent company also received a fresh vote of confidence from analysts at Morgan Stanley. It’s part of a broad theme we’re seeing among analysts from pretty much every firm under the sun: don’t worry so much about Brexit!

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Alphabet revenue estimates trimmed

Morgan Stanley analyst Brian Nowak and team said in a report dated June 28 that they’ve trimmed their gross revenue estimate for 2016 by 1% in the wake of their recent call with ad agencies Merkle and RKG. They found on the call that spending on search has decelerated, so they have become more conservative, although they’re still 3% higher than consensus for second quarter adjusted earnings.

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They’re now expecting 22% growth in Websites for the second quarter, excluding currency exchange. They believe the main factor behind the deceleration in search spend on RKG is the fact that the second quarter marks one year since the minimum bid requirements for branded keywords were increased. They add that RKG said branded cost per click climbed about 30% from the first to the second quarter of 2015, noting that the firm makes up only about 1% of Google’s total search revenue.

However, they also observe a 74% r-squared between the firm’s results and Google’s reported ad revenue growth.

Innovation still strong at Alphabet

The Morgan Stanley team said investors shouldn’t worry though because “innovation-based drivers” remain intact. They believe investors are underappreciating some forward drivers for Google Websites, especially expanded text ads, desktop search and maps. Google said in May that it has expanded the size of text ads by about 50%, and Nowak and team said early results suggest that the click-through rate to advertisers has received a boost.

They also expect desktop search to accelerate this year with the addition of Product Listing Ads to image search and the removal of right-hand rail text ads driving the acceleration. Next year, they expect Maps monetization to provide about a $1.5 billion boost to Websites revenue, and they also pointed out that we’re still in the early days of the Customer Match product.

Mozilla weighs on Google’s results

Traffic acquisition costs have also been in focus since Alphabet’s first quarter earnings report because they accelerated by more than 1,000 basis points from the fourth quarter to the first quarter. The Morgan Stanley team noted that there are many factors pushing traffic acquisition costs higher, such as the mix shifts to mobile and within mobile and changes in contracts with major distribution partners such as Apple and smartphone manufacturers.

However, this time they blame Mozilla. Google’s distribution contract with the search firm ended in November 2014, and they estimate that the acceleration in traffic acquisition costs in the first quarter was driving by the lapping of the loss of that contract more than anything else. After adjusting for Mozilla, they estimate that Google’s traffic acquisition costs moderated rather than accelerated in the first quarter. They add that this is important for the rest of the year as it suggests that their past forecast for traffic acquisition costs for the second quarter might have been too high.

The Morgan Stanley team maintained their Overweight rating and $865 price target on Alphabet stock. Shares of Alphabet closed up 1.49% at $691.26 on Tuesday.

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Michelle Jones is editor-in-chief for and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at
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