GOOGLE: Revenue Acceleration and Favorable Margins -- Pivotal Research

For 4Q16 Alphabet reported gross revenue growth of 22 and revenue exTAC growth of 23 More impressively on a constant currency basis the company delivered 24 growth Advertising was as always the primary driver of the business growing by 17 in the quarter and amounting for 86 of the companyamp8217s revenue Nonadvertising businesses within the Google division grew by 62 yearoveryear Our expectations and those of consensus for total revenue growth at 17 were well below what the company deliveredLooking at expenses despite rapid acceleration in operating costs for categories of expense such as costs of hardware content and TAC to distribution partners other categories such as TAC to network partners RampampD sales ampamp marketing and general ampamp administrative expenses were relatively contained Combined the company produced margins that were higher in the quarter vs the yearago period although much of the improvement was due to less spending on businesses within the amp8220Other Betsamp8221 reporting segment Consequently adjusted EBITDA margins exTAC matched our expectations of 479 EPS growth of 8 came in below our expectations of 13 in part because the companyamp8217s effective tax rate of 22 was higher than the 18 rate included in our model for the quarterAs we reflect upon longerterm trends impacting the companyamp8217s core advertising business trends seem pretty clear with Google reinforcing its cohegemonic position alongside Facebook on an ongoing basis Although the company calls out its expansion in mobile search video and programmatic advertising activity as leading sources of growth and they probably do drive some incremental revenue we see mobile search growth as generally cannibalizing its own nonmobile search activity much as programmatic advertising cannibalizes nonprogrammatic sales at its display network GDN By contrast product innovations such as Customer Match and the establishment of marketing technology products are more critical factors helping the company grow its market share over time and might be responsible for some of the acceleration in advertising revenue growth the company has delivered over the past year relative to prior periods We also note that it appears YouTube is sustaining its progress in capturing share of online video while also making an increasingly plausible case for capturing traditional television budgets This weekamp8217s news that Google would allow advertisers to buy YouTube using Google account information will likely contribute further to this trendWhatever the drivers the Googleamp8217s core business benefits from scale and offers the potential to improve the efficiency of most aspects of the companyamp8217s operations Capital expenditures are also being managed reasonably well as evidenced by the recent retrenchment of Google Fiber However there are evidently factors that will hurt margins such as rising TAC from distribution expenses In addition the company is expanding its consumer electronics efforts and relying heavily on marketing including notably a significant amount of amp8216traditionalamp8217 media which should negatively impact margins on an ongoing basis as well although we recognize the advantage of continuing to expand these businesses into the futureOverall we think the quarter should be viewed positively As the companyamp8217s revenue base is higher than we otherwise expected the current revenue trajectory paired with our preexisting operating margin and tax expectations we use a 25 rate in our modelamp8217s terminal year leads to a higher valuation Our new price target on a YE2017 basis is 970 vs 960 previously We continue to rate the stock BuyVALUATION We value Alphabet on a DCF basis Our valuation incorporates a longterm 55 growth rate a shortterm 81 discount rate and a 110 longterm discount rateRISKS Core risks for web publishers relate to 1 high degree of rivalry in lieu of barriers preventing competition from emerging 2 high and increasing capital needs to remain and 3 government regulations and consumer pushback related to data management and privacyFULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE GOOG 12717pdfThe opinions and points of view expressed in this article are exclusively the views of the author andor subjects and do not necessarily represent the views of MediaVillagecomMyersBizNet Inc management or associated bloggers

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GOOGLE: Revenue Acceleration and Favorable Margins -- Pivotal Research

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Brian Wieser

We Are the Outliers - By Jack Myers

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GOOGLE: Revenue Acceleration and Favorable Margins -- Pivotal Research

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Brian Wieser

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