Easy As ABC? Alphabet Shares 'Should Work' In 2017

Despite Alphabet Inc GOOG GOOGL benefiting from several secular tailwinds and management actively buying back shares, Aegis Capital’s Victor Anthony believes investor sentiment has been low on the stock during 2016 due to tough revenue comps and expectations of margin pressure at the core Google segment.

Anthony initiated coverage of the company with a Buy rating and price target of $980.

Working Through Concerns

The analyst also pointed out that in recent time, “the Trump impact” and FX have also been causes of concern for investors.

However, Anthony believes the stock should work through these concerns “due to growth opportunities in Search as a result of new and enhanced ad formats and AI, continued strength at YouTube, and growth of enterprise cloud computing.”

The combination of these factors is also expected to offset the tough comps and margin pressures from increasing traffic acquisition costs, growth investments and hardware sales, while the FX and Trump impact are non-fundamental issues.

Growth Drivers

“To the contrary, we see faster EPS accretion from a lower corporate tax rate, and higher share repurchases, if the 60 percent of Alphabet's cash domiciled oversees was repatriated and used to aggressively repurchase shares,” the analyst mentioned.

In addition, Anthony noted that mobile search remained a significant driver of search growth, with newer ad formats, along with device bidding, expected to increase advertiser ROI and drive increased ad spend on Google.

Moreover, YouTube has been a meaningful driver of revenue growth for Alphabet over the past two years, and with the ongoing secular shift of video to online, the analyst expects YouTube to continue to grow at a rapid pace.