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Alphabet Roundup: Upgrade, Verily, Duo, Play Store & More

Sejuti Banerjea

Alphabet GOOGL stock has beaten the S&P 500 through most of 2018. And that’s come from consistent revenue growth of 20%+ over comparable periods in the prior year.

 

While operating income growth was also consistent, the margin shrank significantly for a number of reasons including decelerating paid click and impressions growth, still-weak cost per click and cost per impression, and increasing TAC to network members and distribution partners as a percentage of revenue, all of which served to weaken the gross margin.

Operating expense management was generally robust throughout with an uptick in sales and marketing. Other bets revenue was up as were related expenses.

As the chart below shows, both 2019 (light blue line) and 2020 (red line) estimates have come down a bit in recent months, although they remain considerably higher than the preceding years. So while some of the pessimism in the market has tempered analyst expectations, there remains significant room for growth.

 

Also, at 22.6X forward 12 months P/E, the shares are trading below their 5-year median and their relative premium to the S&P 500 also looks reasonable.

 

So with that, let’s jump to the top stories from last week-

Canaccord Upgrade

Canaccord analyst Maria Ripps sees 15-20% revenue growth in the next 2-3 years, abating gross margin pressure, ability to fend off new competitive pressure from Amazon’s advertising business and reasonable valuation as good reasons to upgrade Alphabet shares from Hold to Buy while raising her price target from $1,140 to $1,250.

Verily

In its latest funding round led by private equity firm Silver Lake, Verily raised a billion dollars. Following the investment, Alphabet CFO Ruth Porat and Silver Lake MD Egon Durban will join existing board members Verily CEO Andrew Conrad, Alphabet executives Larry Page, Sergey Brin and David Drummond, and Temasek senior managing director Fidah Alsagoff.

In 2017, Singapore based Temasek invested $800 million in the company. The funds from the latest round will be used for acquisitions and partnerships that can advance/complement its various healthcare initiatives.

Duo Group Calling

Android Police sources spotted a couple of new features in Duo that Google appears to be testing. The first is group calling for up to seven people that Apple Face Time already enables for up to 32 people. Still, we don’t know how many people the final version will support although it’s an important step bringing Dup up to speed with other video calling apps.

Low-light mode that "automatically adjusts your video in dark environments so others can see you better" was the other useful if less exciting feature being tested.

Radar-based Motion Sensor

The Soli sensor that captures motion in a three-dimensional space using a radar beam to enable touchless control of functions or features, can now be deployed by Google at much greater power, making them suitable for use onboard aircraft.   

The Federal Communications Commission’s approval stems from the benefit the technology offers users with mobility or speech impairments. It expects this to "serve the public interest by providing for innovative device control features using touchless hand gesture technology."

The Epic Advantage Over Play Store

Epic Games is making another attempt to retain more of the money its games generate. The creator of the hit game Fortnite is welcoming developers to its own mobile app store for Android. The company will allow developers to keep 88% of their apps’ revenues, significantly higher than the 70% that both Google and Apple currently allow if they build on its platform.

The deal is even more profitable if the developer uses Epic’s Unreal Engine, the cost of which is included in its 12% revenue share. The developer then needs to pay just 12% rather than (30+12)% in the Play Store.

Not everyone will jump on board of course, but if a few big developers deflect, there could be an impact on Play Store revenue.

Exploits Bermuda Tax Haven

A recent filing with the SEC shows that in 2017, the company moved 19.9 billion euros (17.9 billion pounds) to a Dutch shell company.  

San Bernadino Case Dismissed

A case seeking to hold Facebook FB, Google and Twitter TWTR responsible for the San Bernardino shooting has been dismissed by a federal judge. The case can’t be filed again.

The case was filed because the companies allegedly allowed the Islamic State to flourish on their platforms although they weren’t in fact directly involved in providing tools to terrorists. The judge ruled that "A contrary conclusion poses boundless litigation risk and is not tenable given how interconnected communication services are with modern economic and social life".

The judge also found no liability for aiding and abetting terrorism under the 2016 Justice Against Sponsors of Terrorism Act (JASTA), finding that the companies were only "generally aware" that Islamic State used their services.

Wall Street’s Next Amazon

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>


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