Argus maintained a Buy rating on Alphabet but raised its price target to $900 from $850, which implies an upside of 22.8% from current prices. This rating is based on the strong growth in mobile search advertising in the third quarter. The firm believes that Alphabet has largely settled a critical investor debate surrounding the move of users from desktop search to mobile search.
Alphabet reported third-quarter results on October 22. Gross revenue rose 13% year over year to $18.675 billion. However, negative foreign exchange movements shaved eight percentage points from revenue growth, a net $1.3 billion after hedging.
Including traffic acquisition costs (TAC), net revenue rose 15% to $15.1 billion. Alphabet’s management called out substantial growth in mobile search revenue, along with significant contributions from YouTube and the company’s programmatic advertising sales. TAC was 21% of advertising revenue, down slightly from the same period last year and stable sequentially. Paid clicks rose 23% from the previous year. Cost per click (CPC) again declined, falling 11% from the prior year. CPC has declined as paid clicks have risen for many quarters due to a variety of factors, including a mix shift from higher yielding ads on desktops to lower yielding ads on mobile devices, the company’s efforts to reduce lower-quality advertising inventory, and negative foreign exchange effects. However, management called out the growth in YouTube’s TrueView advertisements as a primary factor in the third quarter.
In the report Argus said:
While the transition to the Alphabet holding company structure has been a source of confusion for some, investors should not be fooled into thinking that the company has changed in any fundamental way: it continues to be driven by digital advertising revenue, with search advertising at its core, and by its extraordinary positioning as the search engine leader. The company is now navigating another paradigm shift — from desktop to mobile. We think that the Alphabet reorganization will help to develop the company’s next generation of leaders, as well as new ideas, products, and businesses. Giving senior executives C-level authority to run their businesses may also stem the steady flow of top managers out to other Silicon Valley firms.
Shares of Alphabet were last seen trading up 1.9% at $732.86, with a consensus analyst price target of $832.89 and a 52-week trading range of $490.91 to $752.50.
Year to date, Alphabet shares are up about 36%, compared to a 1% increase in the S&P 500 and a 7% increase in the S&P 500 Information Technology index.
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