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Stock Analyst Update

Alphabet's Q2 Beats Expectations; Raising FVE to $3,200

An impressive increase in search ad revenue was accompanied by continuing growth in YouTube advertising and subscription revenue, combined with Google gaining further traction in the cloud market. We continue to believe the stock is attractive.

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We are increasing Alphabet's (GOOG) (GOOGL) fair value estimate to $3,200 from $2,925 as the firm’s second-quarter results not only beat expectations but were also indicative of faster and more sustainable digital advertising growth than we previously expected. An impressive increase in search ad revenue was accompanied by continuing growth in YouTube advertising and subscription revenue, combined with Google gaining further traction in the cloud market. We continue to believe the stock is attractive.

Alphabet reported total revenue of $61.9 billion, up 62% from the pandemic-ridden second quarter of last year. Google Services revenue increased 63% year over year to $57.1 billion, due to 68% and 84% growth in search and YouTube, respectively, which not only drove total advertising revenue 69% higher year over year but also 55% above the second quarter of 2019. Demand for search ads remained high from the retail sector, while the economic recovery also drove a turnaround in travel, similar to what we were expecting. The latest TSA data (through July 26) shows that the 30-day average travel throughput stands at 80% of 2019 levels, up from 52% at the end of March and 74% at the end of the second quarter, which is when new COVID-19 cases began to increase.

On the YouTube side, we were not surprised by the return of brand advertising demand, driven by the economic recovery and the platform’s more than 2 billion users. In addition, YouTube continues to improve its direct response offerings (which should keep attracting small and medium-size businesses) that increase the likelihood of making video ads actionable by viewers. YouTube Shorts, which is Google’s version of TikTok, rolled out globally and could represent additional revenue in the long run. Management stated that YouTube Shorts, which was launched initially only in India during third quarter 2020, already has over 15 billion daily viewers.

 

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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