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Alphabet Inc.’s commentary on the advertising market helped ease some of Wall Street’s worst fears, but the company isn’t out of the woods yet.
The Google parent company posted weaker-than-expected earnings Tuesday and pointed to a mid-teens percentage decline in search revenue exiting March as the COVID-19 crisis rocked the global economy.
The good news for investors was that Alphabet’s GOOGL, +7.94% GOOG, +7.60% management team implied that conditions have not gotten even worse in recent weeks, but Chief Financial Officer Ruth Porat also said not to “extrapolate” from her comments trends for the rest of the quarter.
While Alphabet is starting to see consumers spend a bit more, “it’s not clear how durable or monetizable that will be.”
Still, the shares were set for a big rally Wednesday, up more than 8% in premarket trading.
Opinion: Google gives Wall Street what it wants, and the stock shoots higher
The commentary sparked mixed reactions from analysts.
“Advertising outlook visibility remains limited, but negative trends and potential for macroeconomic revision suggest continued deceleration,” wrote Wedbush analyst Michael Pachter. “Management declined to provide granular guidance or directionality outside of the late Q1 trends discussed, but noted that ad spending is expected to mirror the overall economy for the foreseeable future.”
He rates the stock at outperform with a $1,550 target price.
MoffettNathanson’s Michael Nathanson wrote that the company’s “exiting first quarter run rates are close to our forecasted outcome and will not result in further significant negative earnings revisions to 2020 and 2021 EPS.” At the same time, he also predicts that the company’s ad growth will stay negative for the balance of the year.
He rates the stock a buy with a $1,400 price target.
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Deustche Bank’s Lloyd Walmsley increased his price target to $1,625 from $1,515, but he keyed in on management’s comments that YouTube “has seen a continued decline in brand advertising,” which suggests to him that YouTube “continues to decelerate as brand advertisers take longer to react.” He has a buy rating on the shares.
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Bernstein analyst Mark Shmulik called Alphabet “a lighthouse in a COVID sea” while suggesting that the company could emerge from the crisis in a stronger position than before.
“Sentiment was decidedly negative going into earnings on pre-announcements/leaks around hiring freezes and sales & marketing spend cuts,” wrote Shmulik, who has an outperform rating and $1,375 price target on Alphabet’s stock. “However, there’s a very plausible scenario where current macro conditions provide the right cover to lean out the cost base and drive margin expansion in a post-COVID world.”
Wells Fargo analyst Brian Fitzgerald said that the end of last quarter was “actually not that bad” but he also cited a non-COVID concern.
“Google announced last week (and highlighted on the earnings call) the inclusion of organic search results in Google Shopping for the first time since 2012,” Fitzgerald wrote. “While we believe the financial impact is likely to be muted…we view the change as a confirmation of (and effort to reverse) retail/product search share losses to Amazon.”
He has an overweight rating on the stock and raised his price target to $1,575 from $1,500.
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At least 17 analysts increased their price targets on Alphabet’s stock after the report, while two lowered theirs. Of the 43 analysts tracked by FactSet who cover Alphabet, 39 rate the shares at buy and four rate them at hold, with an average price target of $1,505.37.
Alphabet shares are off 16% over the past three months as the S&P 500 SPX, +2.03% has declined 13%.
