Alphabet And Amazon Join The $1,000 Price Target Club At Credit Suisse

Budget Deployment Accelerating At Alphabet

Based on feedback from advertisers, Credit Suisse analyst Stephen Ju said budget deployment into search started to accelerate into the third quarter and into the holiday selling season. The acceleration, according to the analyst, is due to an array of products, new and old, with the newly introduced Expanded Text Ads being a major contributor.

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Buyers Of Alphabet Shares

The firm remains buyers of Alphabet shares, given the stock was thus far held back by the potential for deceleration due to tougher comparisons and multiple compression, beginning in the third quarter. Credit Suisse now believes the stock warrants a higher multiple as it should be able to maintain forex-neutral growth rates in excess of 20 percent.

Investment Thesis For Alphabet

• Continued narrowing of mobile/desktop monetization gap in international combined with eventual higher pricing for mobile CPCs.
• Bigger contribution from non-search businesses such as YouTube, Play and eventually Google Cloud Platform.
• Optionality and upward bias to estimates from Alphabet's other investments.

Amazon's AWS Margin Potential Controversial

Credit Suisse believes Amazon Web Services' long-term operating margin expansion potential remains controversial. The firm models 40 percent, plus, long-term operating margin, premised on an aggressive SG&A expense growth, moderating CapEx and D&A expense growth. The margin assumption, according to the firm, would mean AWS accounting for 40 percent of its consolidated free cash flow estimate. The firm sees upside bias to its FCF projections, as it believes deceleration expectation could ultimately prove conservative.

Valuation Thesis For Amazon

• Free cash flow should reset higher as capacity intensity to run AWS is starting to level off as usage growth drops below 100 percent.
• E-commerce segment operating margin expansion due continued shipping loss moderation.

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Price Targets, Ratings

Credit Suisse raised its price target on Alphabet to $1,070 from $940, as it rolls forward its valuation parameters to contemplate end-of-2017. The price target on Amazon's shares was lifted to $1,050 from $920.

For both companies, Credit Suisse has Outperform ratings.

At the time of writing, Amazon shares were down 0.96 percent at $815.42, while Alphabet's GOOGL shares were up 0.80 percent at $811.05. Alphabet's GOOG shares were up 0.54 percent at $782.73.

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