Alphabet Inc (NASDAQ:GOOGL) reported its earnings yesterday after the market closed, delivering better-than-expected revenue growth. Below are the comments from analysts on Google’s earnings, they see continued momentum in Google Cloud.
Upside quarter a big contrast to 1Q Alphabet net revenues at $31.5bn above the Street at $30.8bn, operating income was above at $9.18bn vs $8.59bn, and GAAP EPS of $14.21 was above the Street at $11.10 (aided by other income that added $2.00+ in EPS). Overall, a strong Q that represented a big reversion from the deceleration and disclosure vacuum from 1Q. While we would not expect a new disclosure/buyback encore next quarter, the acceleration in Website growth suggests concerns on the demise of search growth were overdone.
Google reported revenue +2$ and EPS +26$ above consensus, and the tone of the call was upbeat. After the shell-shocking 1Q print, these results should go a long way towards restoring damaged investor confidence. Google segment operating income grew the fastest (+16$) in two years, and every geography showed accelerating revenue. In contrast to Facebook which had significantly easier comps in 2Q, Google’s sites acceleration is even that much more impressive. At 22.8x 2020 GAAP EPS and with regulatory headline risks lurking around every corner, some of our optimism is starting to get priced in. But as we look across large cap tech and the overall s+p, there are few companies with the scale and growth profile of Google, in our view.
Alphabet delivered solid topline results after 1Q's disappointment and margins were particularly strong relative to recent trends. With that said, there's no change to our view for long-term deterioration due to mix shift. But Google Cloud continues to grow as a contributor (now at an $8B run-rate) and could become an intermediate-term margin stabilizer once investment there abates. And with large-scale M&A unlikely in light of antitrust overhang, continued growth of buybacks should make value investors increasingly comfortable with the name. We look for a better entry point after tonight's move and remain Market Perform.
Following a temporary slowdown in Properties ad revenue growth in Q1, Q2 growth accelerated by ~80bps sequentially, and total advertising revenue beat consensus by ~1%. Google continues to show favorable TAC dynamics with Network TAC as a % of revenue declining both q/q and y/y and total TAC showing leverage due to favorable mix shift, although this was somewhat offset by faster-growing Other COGS. Other revenue growth accelerated this quarter on strength in Google Cloud and the successful launch of Pixel 3a. We think that several product changes introduced earlier this year will likely drive accelerating advertising growth in 2H, which coupled with other growth vectors (Cloud, Other Bets), ongoing buyback to offset dilution, and reasonable valuation, create an attractive investment case in the large-cap tech universe.
Total gross revenue in 2Q19 was $38.9BN (+19% y/y; +22% y/y x-FX), ~2% above our and cons. estimates of $38.3BN and $38.2BN. The +22% y/y x-FX gross revenue growth rate tracked above 1Q19 (+19% y/y) and just below 2Q18 (+23% y/y). Net revenue totaled $31.7BN, +20.8% y/y and ~2% above our/cons. $31.0BN/$30.9BN est's driven by strength across O&O (~1% above our/cons.est's), Network revenue (in line with our/cons. est's), Other revenue (~10%/11% above our/cons. est's), and TAC (a touch better vs. our/cons. forecasts despite rev. beat), which mgmt. indicated was from continued mix shift to Sites & partially helped by growth of TAC-free YouTube rev. within Sites.
Sites revenue growth stabilized and GCP likely accelerated, which drove total 2Q net revenue up 21% y/y to $31.7B, which was above our and consensus estimates. 2Q EBITDA (including SBC) of $12.0B also exceeded our estimate of $11.7B and consensus of $11.3B. Investment gains helped drive EPS to $14.21, which beat our estimate of $10.74 and the consensus estimate of $11.17.
GOOGL reported strong ad revenues with growth accelerating 120bps FXN, above our agency checks. Management attributed the surprising strength to YouTube and GCP. Geographically, we saw strength came from across the board, especially in international markets. We are raising our 2021 EBITDA by 2% to $80bn and our PT from $1,350 to $1,400, representing 10.8x our 2021 EBITDA vs estimated CAGR of 17%. We are relieved that ad revenue growth has rebounded quicker than expected, and we continue to like the company’s fundamentals over the longer-term.
The revenue outperformance was driven primarily by solid advertising revenue and a large beat in Other Revenue fueled by Google Cloud (company disclosed that the business is now at an $8bn annual run rate.
Expense commentary was largely consistent with previous quarters around focus areas, though the company noted that 2019 headcount growth is likely to be closer to 2018’s (higher than previous), driven by Cloud hiring and the Looker integration
We are maintaining our Outperform rating and raising our price target to $1,370 from $1,342, as 2Q19 results exceeded on all metrics and the company increased repurchase authorization. The modest acceleration in gross website stabilization in net website revenue (stable on net) should allay fears of a secular slowdown vs. timing of product releases. YouTube was the second-biggest driver of growth (after mobile search), followed by Google cloud (now at $8B run-rate). Total net revenue accelerated to +21% y/y vs. +19% in 1Q, while Google Segment EBITDA increased 16% y/y vs. 15% in 1Q. Increasing 2020 EBITDA and GAAP EPS by 8% and 15%, respectively, with EPS aided by repurchases.
Alphabet reported solid 2Q results (after somewhat disappointing 1Q results) driven by Google Properties growth of 17.5% y/y and Licensing and Other revenues increasing 40% y/y partially driven Google Cloud. Google Cloud reached an $8B run rate (up from $4B in 4Q17) driven by strength in its compute and analytics products. Operating expense growth and TAC expenses also continue to moderate, leading to EBITDA outperformance. We maintain our Outperform rating and $1,360 price target given solid advertising growth (mobile search/YouTube), increasing Google Cloud momentum, and an attractive valuation (~17.5x 2020E core EPS ex cash).
RBC Capital Markets
Gross Revenue of $38.9B was nicely ahead of RBC/Street, with strength driven by the Three Horsemen: Mobile Search (helped by Q2 redesign & ML innovations), YouTube & Google Cloud. Vs. Q1, Revenue Growth accelerated across the board – across verticals and regions. In context, Q1 was the outlier, as Q2 growth rates were very consistent with prior levels. GAAP Op Income of $9.2B came in approx. 8% above RBC/Street, largely due to better than expected leverage in S&M and G&A. All in, Fundies were reasonably positive – 22% Organic Revenue growth accelerated 3 pts vs. Q1 and matched the 9-year average, while GAAP Op Margin fell a modest 130 bps Y/Y (adjusting for EC fine).
Net revenue (ex-TAC) was $32.52B, indicating net revenues grew 19.3% y/y, an acceleration compared to 1Q19's growth rate of 16.7% but still a deceleration from 4Q18's 21.5% y/y growth. Google Sites did well, with gross revenues of $27.3B (+18% y/y) vs. consensus of $27.13B, Network was $5.27B (+9% y/y) vs. $5.29B, and Google Other was $6.18B (+40% y/y) vs. $5.58B, and Other Bets was $162M (+12% y/y) vs. $171M. The Other Google revenues helped power the beat with the new mid-range Pixel phone and its related Play sales. As a result, Operating Income was better than expectations at $9.18B vs. consensus of $8.59B as TAC was lower than expected due to ongoing mix shift. GAAP EPS was $14.21 vs. consensus expectations of $11.10, which was caused by an increase in OI&E from the fluctuations in investment values made by Google Capital, GV, and Alphabet.
After a volatile last three months due to a Q1 revenue miss/decel in core Sites revenue, GOOG mgmt completely reversed that narrative by checking every investor box on its Q2 '19 earnings call – better Core Sites growth (with positive commentary on YouTube & search), better margins in core (while making key investments & compounding growth), adding additional operating commentary in the earnings call (cloud, capex, outlook) & announcing a new $25b buyback authorization. Looking out to 2H 2019, we see continued momentum in Google Cloud, product innovation (both consumer & advertiser) and another hardware cycle as all supportive of strong growth ahead. Looking out long term (especially when risk/reward is measured against YTD underperformance), we reiterate our Buy rating and see all long-term drivers solidly intact (AI/machine learning, local advertising, media consumption, cloud computing, hardware & Other Bets).