SunTrust Focused On Google's Core, Lowers Target To $850

For Alphabet Inc GOOGL, Bob Peck of SunTrust Robinson Humphrey believes “the bull/bear debate will center around the secular cost headwinds from mobile and programmatic TAC and the incremental core investments vs. solid ex-FX topline results, the inherent leverage of the platform and incremental cash flows.”

Peck maintained a Buy rating on the company, while lowering the price target from $875 to $850.

Q1 Metrics

Alphabet reported 23 percent growth in revenues for Q1, ex-FX, as compared to 24 percent growth in 4Q15.

Sites increased 20 percent, flat quarter-on-quarter, driven by easier comp due to expansion of the mobile search inventory and improvements in targeting/analytics.

Although sites paid clicks sustained a 38 percent year-on-year growth rate, CPCs declined 12 percent, as compared to a 16 percent decline in Q4.

Mixed Quarter

“Desktop improved on right rail changes and 4th link,” Peck stated, while adding, Network decelerated to 3 percent year-on-year growth and the Other “Bets” accelerated to 108 percent year on year growth.

According to the SunTrust report, “Op. Margins improved ~90bps; while the drag from "Other Bets” narrowed to 402bps, Core op margins came in below expectations as well as recent margin expansion trends.”

Total TAC rate fell, driven by mix, although it rose for Sites and Networks to multi-year highs.

Despite the negative impact on Other Income, the adjusted EPS beat the consensus expectations.

The net revenue, EBITDA and EPS estimates for 2016 and 2017 have been lowered.