New Price Target for GOOGL After Head-and-Shoulders Beat
Alphabet quelled concerns with its latest earnings report and we're making a change to our outlook.
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On Thursday night, Alphabet GOOGL delivered its latest quarterly earnings report and it’s fair to say that, just like we saw with ServiceNow’s NOW earnings, it quelled many of the concerns that pressured the company’s shares over the last few weeks.
Even after adjusting for the $8 billion unrealized gain on a private investment company investment housed in Alphabet’s Other Income line, it still delivered a head-and-shoulder consensus EPS beat for the quarter led by better-than-expected revenue but also meaningful margin improvement at Google Services and Google Cloud. The only knock we would point out was the modest sequential revenue improvement at Google Cloud, but it was still up a hefty 28% year over year.
As we discussed earlier this year, the business’s capacity constraints are being addressed by Alphabet and management reaffirmed that the bulk of its $75 billion capex plan for this year will be for servers, data centers and networking to support AI and cloud growth. That level of growth along with the comments we shared on Thursday from Amazon AMZN and Nvidia NVDA as well as other data center related comments should reinvigorate shareholder appetite for those shares as well as those for Marvell MRVL, Eaton ETN and others.
Next week brings quarterly results from Amazon but also Meta META, Microsoft MSFT and Apple AAPL as well as data center company Equinix EQIX. It’s fair to say that by the end of next week, we’ll have a much clearer picture of 2025 capital spending efforts on AI and data center, but what we are seeing so far is very encouraging.
As it relates to GOOGL shares, we remain bullish given the company’s prospects for advertising-related revenue growth via Search and YouTube as well as continued AI and cloud adoption. We will continue to monitor the economic landscape and what that may mean for overall advertising spend, but the company’s position in Search and with YouTube keeps it well-positioned to capture the ongoing shift to digital advertising from other modalities. As it reaps the benefit of cost savings and margin leverage, the company’s free cash flow levels and cash levels provide ample coverage for further investments across its business lines.
Trimming Price Target to $200 and What to Watch Next
Similar to what we saw with NOW shares, we are seeing many across Wall Street walk back recent price target cuts for GOOGL shares, with the likes of Citi and BofA lifting theirs to $200 from $195 and $185, respectively. In keeping with our recent price target revisions for United Rentals URI and NOW shares, we will trim our GOOGL price target to $200 from $210, which still leaves ample upside to warrant our One rating.
With Friday morning’s post-earnings reaction is poised to pop GOOGL shares over the 50-day moving average, we see resistance at both the 200-day moving average ($172.11) and again at the 100-day moving average ($177.30). This suggests to us the market will either need to see meaningful progress on trade deals or company-specific developments to drive the shares higher in the next few weeks.
One event that could provide some of that firepower is the Google I/O 2025 event on May 20 to May 21. That event is likely to bring a larger update for the company’s AI and product offerings, which should speak to concerns over AI versus Search and competition from the likes of ChatGPT. Based on what we learn at the event, we will revisit our GOOGL target as needed, but a more likely reason for us to do that would be relief over advertising spending concerns and the re-acceleration in Google Cloud.
While there was no real discussion of the recent U.S. District Court in Virginia ruling that Google has illegally monopolized online advertising markets, we will continue to follow developments. We are seeing renewed calls to break up the company, but as we’ve discussed before, that is likely to be a long winding road to any outcome. Nearterm, we’ll continue to focus on its AI, YouTube and cloud efforts.
The March Quarter
Alphabet reported March quarter EPS of $2.81 per share, $0.80 better than the $2.01 consensus, on revenue of $90.23 billion, up 12% year over year, which outpaced the $89.18 billion market forecast. Noted above, the company benefitted from an $8 billion unrealized gain, which we estimate contributed $0.54 in EPS to the quarter. Even after stripping that out, EPS of $2.27 was still well ahead of the market consensus. Revenue gains were had across all the company’s reporting segments and Google Services (Search, YouTube, Network) still accounts for 85% of total revenue and the vast majority of its operating profits.
Turning to those operating profits, they rose and climbed 20% year over year, a much quicker pace than overall revenue growth of 12%. Said another way, Alphabet’s operating margin rose to 33.9% in the March quarter, some hefty expansion compared to 31.6% in the year-ago quarter and 32.1% in the December quarter. What’s noteworthy in comparing the March and December quarter margins is the sequential increase despite the seasonal dip in revenue. What this tells us is Alphabet’s efforts to streamline cost and drive productivity are paying off. It also gives Wall Street a reason to revise EPS expectations higher for the coming quarters.
Boosting Share Repurchase Program and Dividend
During the March quarter, Alphabet repurchased $15.3 billion in stock, leaving $29.5 billion remaining under its April 2024 repurchase authorization of $70 billion. Alongside its March quarter earnings report, the company shared the board authorized the repurchase of up to an additional $70.0 billion.
Alphabet also unveiled a 5% quarterly dividend increase to $0.21 per share. The first of this new quarterly dividend will be paid on June 16 to stockholders of record.
Stepping back, the combination of 2025 capital spending levels and increases in both the share repurchase program and the dividend send a signal about the company’s confidence in its prospects. Our view has been that given its position in search and the presence it has through YouTube as well as its ability to monetize both, Alphabet remains well positioned in the AI race.
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At the time of publication, TheStreet Pro Portfolio was long GOOGL, NOW, AMZN, NVDA, MRVL, ETN, META, MSFT, AAPL and URI.
