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Alphabet Inc. produced a significant amount of accounting noise with Monday’s earnings report, with analysts saying Tuesday morning that one-time items in profit and spending made it more challenging to compare these results to past performance and model for the future and investors sending shares down.
Among the items that clouded the Google parent company’s statement were the HTC acquisition—which added about 2,000 engineers to Google’s payroll—the Waymo-Uber Technologies Inc. settlement, as well as the markup of the company’s $3 billion stake in Uber, among other items, according to Barclays analyst Ross Sandler.
Even amid the financial haze, there is no doubting Alphabet’s top-line growth fueled by the company’s massive mobile search advertising business, with hefty contributions from desktop search and YouTube. Factoring out foreign exchange, sales grew 22.6% compared with the year-earlier period, JP Morgan Chase analyst Douglas Anmuth wrote in a note to clients early Tuesday.
“Alphabet again delivered strong top-line results, proving that increased investments are paying off,” Anmuth wrote. Anmuth rates Alphabet class A stock a buy with a $1,285, lowering it from $1,330 on lower earnings power.
Tuesday’s trading, however, did not reflect the company’s top-line strength and tumult in the markets weighed on the class A stock, sending it down nearly 5% in afternoon trading. Tuesday saw a market rout as the S&P 500 index Dow Jones Industrial Average and Nasdaq Composite Index all declined.
Analysts seemed most concerned about Alphabet’s capital-expenditure spending, and at least 14 of them brought their price targets down after the earnings, according to FactSet. Two analysts did increase their targets, however, and none changed their ratings; 39 of 45 analysts tracked by FactSet rate the company the equivalent of a buy, and the rest have the stock rated as a hold.
The strong revenue growth prompted Monness Crespi Hardt analyst Brian White to raise his price target to $1,306 from $1,280. With a buy on the name, White said in a note to clients that because the company beat revenue expectations—and his own team’s estimates—and the stock performed well during the data privacy issues related to Facebook Inc. it will continue to trade well.
Alphabet’s investments and other operational factors have begun to weigh on its once-fatter margins, however. Canaccord Genuity analyst Michael Graham wrote in a note to clients Monday evening that gross margins contracted by 3.7%, the largest in the company’s history. Graham pointed to data center costs as one of the most significant, but also hardware costs and content revenue sharing at YouTube.
“With YouTube’s rapid growth (also in non-ad-supported services) and a greater emphasis on hardware made by Google, we think this gross margin contraction will continue,” Graham wrote. Graham dropped his price target to $1,050 from $1,100 and rates Alphabet stock a hold.
Barclays’ Sandler also pointed to expenses as one of the two concerns his team has coming away from the earnings call and pointed to the company’s increased spending on infrastructure—which effectively doubled—as well as traffic acquisition costs on mobile devices.
“Stepping back, what matters the most on these kinds of Alphabet prints historically is that Sites revenue growth is well ahead of expectations and not decelerating at all despite a tougher comp (and next quarter core Google margins trajectory and Sites TAC should improve),” he wrote. Sandler lowed his price target to $1,250 from $1,330 and has a buy on the name.