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Alphabet's Open Wallet Is Winning Few Friends on Wall Street

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(Bloomberg) -- Higher spending again dogged Alphabet Inc. results despite reporting the strongest sales growth in almost four years. A handful of analysts cut their price targets. Jefferies expects 2018 to be an investment year as Alphabet takes a run at Amazon.com Inc. in Home and Cloud while also building up YouTube and Waymo. Meanwhile, Morgan Stanley says “multiple moving pieces” in the first quarter report give fodder to both bulls and bears. The shares fell as much as 3 percent, their biggest drop in three weeks.

Jefferies, Brent Thill

“2018 sounds like an investment year, given the company is taking on multiple challenges -- catching up to Amazon in Home/Cloud, while also driving multiple large businesses forward (YouTube, hardware, Waymo) -- which we think will ultimately help fuel sustained revenue growth and improved competitive positioning longer-term.”

Alphabet’s report “was highlighted by the best revenue growth we’ve seen since 2014, offset by margin compression and elevated capex spend”

Maintains buy rating, price target $1,360

Mizuho, James Lee

U.S. revenue growth slowed less than expected, as “management attributed the strength to mobile search/YouTube and the positive development across the geographies.”

“Core website advertising better than our checks” while “operating income slightly soft ex-accounting due to increased investments.”

Lowers price target to $1,350 from $1,400, maintains buy rating

Pivotal Research, Brian Wieser

“Alphabet reported a decent 1Q18, but worse-than-expected margin compression and capex levels have negative read-throughs for our model.”

“More important than the revenue gains, the big story from the results was the significant rise in expenses, with TAC up +36% (including TAC from Distribution rising +61%) and other direct costs rising +39%.”

Lowers price target to a Street-low $970 from $1,040, maintains hold rating

Wells Fargo, Ken Sena

“Google reported a solid top line but with some notable deleverage across several key operating lines, including TAC, Research & Development, and Sales & Marketing.”

“Taking a more conservative approach to the remainder of the year” with modestly reduced margin outlook due to deleveraging across Sales & Marketing, Other COGS, and R&D.

Overweight, price target $1,275

Morgan Stanley, Brian Nowak

“Results had multiple moving pieces (some for bulls...some for bears) as revenue came in 1% better than expected (3% better than Street) and (by our math) like-for-like EBIT was 6% better than we modeled, though 4% below the Street.”

“Google Websites revenue up 23% y/y ex-FX vs us at 21% y/y,” says this underscores the company’s “long growth runway and monetization potential.”

Raises price target to $1,200 from $1,175, maintains overweight rating

GBH Insights, Daniel Ives

“The bulls were hoping for a bigger beat in our opinion around some of the underlying metrics with much angst around search and YouTube advertising revenues in light of recent regulatory swirls post Cambridge/Facebook.”

“We believe 1Q advertising and ‘bread and butter’ search revenues were healthy and a good barometer of potential strength heading into the rest of 2018.”

“The big lingering question is around the evolving regulatory landscape that could be on the horizon.”

Baird, Colin Sebastian

First-quarter results reflect “solid top-line outperformance, partially offset by continued aggressive investments.”

“Google advertising revenue growth outpaced consensus expectations, while operating profitability was impacted by continued elevated TAC levels, higher levels of stock-based compensation, and presumably ongoing investments in Cloud/YouTube.”

“No change to our thesis”

Rates outperform

Loup Ventures, Gene Munster

“Most notable on the earnings call was CEO Sundar Pichai’s comment that 90% of Google’s revenue is Search related. Search relies heavily on keywords and less on private data, reassuring that in a stricter privacy environment, Google’s core business should largely be safe”

“Google stayed heavy on the AI theme for the sixth consecutive quarter, mentioning it 25 times vs 18 last quarter.”

RBC Capital, Mark Mahaney

“Revenue came in ahead of expectations though Operating Income came in a little light. Growth remains robust and extraordinarily consistent."

Fundamentals “remain very consistent & robust” with 33 quarters of 23% annual growth. “And the 25% GAAP Operating Margin was only a tad below the three-year average of 26%.”

Maintains outperform, price target $1,285

©2018 Bloomberg L.P.

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