Bob Peck Highlights Upbeat Sentiment On YouTube, Mobile On Google

SunTrust commented on Google Inc GOOG GOOGL Friday and maintained a Buy rating with a $650 price target.

Google’s Q1 gross revenue came in at $17.3 billion, approximately 1 percent below the consensus of $17.5 billion. On an FX-neutral basis, revenue growth was fairly stable at approximately 17 percent, versus the reported growth of 12 percent, according to analyst Bob Peck.

Peck also discussed key “incremental takeaways” following Google’s Q1 earnings release.

First, Peck noted that lower CPC was “due to rapid growth of YouTube TrueView ads, which are brand-centric and thus monetize lower than search.”

"Google Sites CPC dynamic is not the result of challenges in monetizing mobile search, as many believe. In fact mobile search is showing 'real strength,'" according to Peck.

Peck felt it was a positive disclosure that, ex-TrueView, “Sites clicks growth would be lower, though still positive, and core search CPC would show increases.”

“YouTube, while not profitable yet, could be if reinvestment was pulled back,” Peck observed.

Second, Peck said that because “operating margin increased sequentially (by 2 points) for the first time in six quarters,” it supported the firm’s “thesis that the company could move to protect profitability and share price.”

The operating margin was 100 bps above consensus at 32.7 percent versus the expected 31.7 percent while FCF was also strong at $3.7 billion, a 4 percent FCF yield.

Related Link: Google Q1 Earnings Conference Call: A Play-By-Play Recap

The FCF performance was viewed as a positive amid continued heavy CapEx in production equipment, data center construction and facilities. Google ended the quarter with $65 billion in cash and $5 billion in debt.

Overall, Peck concluded that “FX-neutral revenue was generally in-line, but margins surprised to the upside. Net-net: a solid quarter in the face of tepid expectations.”

The $650 price target equated to a 2016 EV/EBITDA multiple of approximately 11x and P/E multiple, ex net cash, of approximately 15x.

Google recently traded at $570.58, up 4.31 percent.