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Stock Analyst Update

Alphabet Remains at Top of Digital Ad Market

The Google parent has a better than expected second quarter, and we see shares as fairly valued today.

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 Alphabet (GOOG) (GOOGL) reported second-quarter 2017 results with revenue and earnings coming in above both our expectations and the consensus. The firm remains at the top of the digital advertising space with ad revenue continuing its double-digit growth. Alphabet is also progressing toward diversification as seen by growth from the firm’s cloud offering (GCP). However, continuing increases in traffic acquisition costs, along with decline in cost-per-click, remain a concern. We slightly upped our revenue estimates over the five-year explicit forecast period in our model, which did not impact our $910 fair value estimate of Alphabet. While the firm’s shares are trading down a bit in after-hours, they remain in 3-star territory, and we recommend a wider margin of safety before investing in this wide-moat name.

Alphabet’s core business, Google’s advertising, keeps growing at double-digit rates as Google's gross advertising revenue marched higher 18% year over year, helped by the continuing momentum of the digital ad transition onto mobile devices, which has lasted longer than we expected. Online video ads are also providing overall digital advertising growth an additional push, from which Google’s YouTube is an obvious beneficiary, especially with the bumper ads which are shorter and are more likely to be endured by YouTube content viewers. In our view, other factors such as the 1.5 billion monthly viewers on YouTube, the 60-minute average time they spend consuming the content on mobile devices, and as management stated, the increasing portion of viewers’ watch time on larger screens, will help Google attract more video ad dollars.

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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.