Shares of Alphabet (NASDAQ: GOOGL) are down nearly 23% due to the broader sell-off in the tech sector and the company’s weak Q1’22 results. Investors were particularly concerned about the slowdown in YouTube advertising revenue in Q1
Suspension of the company’s commercial activities in Russia, the pullback in ad spending in Europe amid the Russia-Ukraine conflict, the impact of inflation and other macro headwinds on companies’ ad spending, and tough comparisons hurt YouTube’s Q1 advertising revenue.
Overall, Alphabet’s Q1 revenue grew 23% to $68 billion, while EPS declined 6.4% to $24.62. Despite the disappointing recent results, Wall Street analysts continue to be optimistic on Alphabet. Let’s see why.
Strategies to Ensure Continued Growth
Alphabet continues to invest in lucrative areas, like its cloud business, which generated $5.8 billion of revenue in Q1, reflecting 44% of growth. Though the cloud division is still losing money, the company is optimistic about its future prospects amid growing transition of enterprises to the cloud.
Alphabet is also investing in YouTube to enhance the platform by adding features like YouTube Shorts and live shopping. YouTube Shorts, Alphabet’s attempt to compete against rival TikTok, is now garnering over 30 billion daily views, which is almost four times more than last year’s numbers.
Alphabet is further strengthening its Google search engine through the use of AI (artificial intelligence). The company recently launched Multisearch tool in Google search, which helps people use images and texts to find the most relevant results.
Alphabet is also positive about its other small businesses like its hardware products (e.g. FitBit, Pixel devices, Google Nest home products) and the Other Bets division (comprises its health technology solutions and self-driving car unit Waymo). Though still very small, it’s worth noting that Q1 revenue from Other Bets more than doubled to $440 million.
Wall Street’s Take
Stifel Nicolaus analyst Scott W. Devitt slashed his price target for Alphabet stock to $3,100 from $3,500, and lowered his Q2 estimates due to a “cautious approach to the balance of the year” given management’s guidance and limited visibility into normalized growth rates due to tough comparisons and near-term macro uncertainty.
However, Devitt continues to believe that the stock’s valuation is attractive and reiterated a Buy rating, stating, “Alphabet continues to drive growth at scale through strength in mobile search, YouTube, and programmatic advertising, while investing in other key initiatives (cloud, hardware, AI) that should serve as multi-year growth levers.”
Devitt also pointed to the high utility of Google’s core business and its “durability as a dominant leader in search and ad-supported online video.”
Other analysts on the Street are also bullish on the stock with a Strong Buy consensus rating based on a whopping 30 unanimous Buys. The average Alphabet price target of $3,253.80 implies 44.85% upside potential from current levels.
Conclusion
Wall Street analysts see the weakness in YouTube ad spending as a temporary headwind, and continue to be optimistic about Alphabet’s long-term prospects based on the dominance of Google search engine and YouTube, the growing Cloud business, and other opportunities.
However, investors need to keep an eye on the litigations that Alphabet faces and also the growing competition in the internet ad space.
Alphabet scores a nine out of 10 from TipRanks’ Smart Score rating system, indicating that the stock is more likely to outperform the market.
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