3 Reasons To Be Bullish On Google's Core Websites

Alphabet Inc GOOGL shares have lost more than 7 percent year-to-date. AlphaWise’s Brian Nowak maintained an Overweight rating for the company, while raising the price target from $850 to $865. The analyst expressed optimism regarding Websites and expects Mobile and Desktop Search and Map monetization to drive more than 21 percent ex-FX growth into 2017.

Alphabet’s multiple has compressed by ~400bp since 1Q earnings, partly due to investor concerns surrounding the growth trajectory of the company’s core Websites business, which contributes around 80 percent of ad revenue, analyst Brian Nowak said. The stock lagged the S&P 500 by ~600bp.

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3 Forward Drivers

Nowak enumerated three key drivers for Websites:

1. Mobile search – Data shows searches for online retail/travel purchases made by consumers with large screen smartphones are 5-17 percent higher than those made by small screen owners, which is a positive for smartphone search advertiser ROI and the company’s mobile search business. Continued mix shift toward “large screen smartphones with higher shopping intent” should result in faster mobile search revenue growth, the analyst said. He said that mobile search revenue could accelerate to 45 percent y/y in 2016 from 42 percent in 2015.
2. Desktop search – 60 percent of Websites search revenue is generated from desktops. Alphabet has made several changes to desktop search over the last few months. Nowak believes these are would boost desktop search ad growth. He added, “The benefits of these changes started in 1Q:16 when we estimate GOOGL's desktop search business accelerated modestly and we now expect desktop search revenue to accelerate to ~4% YoY growth in 2016 (from 2% in 2015).”
3. Maps – Maps continue to be among Alphabet’s most under-monetized assets. The company has recently launched new local search ads and Promoted Pins on Google Maps. The analyst believes Google Maps could generate $1.5bn of incremental ad revenue in 2017 “even with just a 50% ad load and if only 50% of the Map ad spend is from incremental budgets.”