Alphabet's Mysterious Cost Of Goods Expense Cost It A Q4 Earnings Beat

The fourth-quarter results of Alphabet Inc GOOG GOOGL was solid as usual except a “mysterious” cost of goods sold (COGS) expense that led to an earnings miss for the search giant.

Non-GAAP EPS of $9.36 was a touch below the Street at $9.64 with a 1x tax issue increasing the rate to 22 percent versus 19 percent for FY 2016. However, gross revenue of $26.1 billion was about 3 percent above the Street at $25.2 billion, with particular strength in licensing & other revenue.

Non-GAAP operating income of $8.49 billion was also 3 percent above the Street with margins of 40 percent and up 50bps. These numbers would have been $8.81 billion/41.5 percent excluding the $320 million in 1x COGS costs, which were only loosely described as equipment-related.

Analyst's Commentary

But, RBC Capital’s Mark Mahaney is bullish on the company, which posted 28th straight quarters (seven years) of 20 percent-ish organic revenue growth.

“Google was growing approx. 20 percent on a $26 billion revenue run rate biz at the beginning of ‘10 and is now growing 20 percent on a $104 billion run rate biz. Very rare. Mobile, YouTube, Programmatic, Google Play and Cloud are all likely to help sustain growth,” Mahaney wrote in a note.

Mahaney believes that Core Search is still growing solidly in the low- to mid-teens, which he says is better than most market participants realize. In the fourth quarter, organic advertising revenue grew 19 percent.

On the metrics front, overall CPC growth continued to drop in the fourth quarter to 15 percent. However, paid clicks grew 36 percent, despite an 8pt tougher comp. The analyst views this as a robust rate.

“We think that the ongoing transition to Enhanced Campaigns, Expanded Text Ads and general consumer behavior to use their phones more for transactions should drive up Mobile CPCs in the long term,” Mahaney added.

Mahaney reiterated his Outperform rating and $1,025 price target on Alphabet shares. At last check, Alphabet shares were up 0.32 percent to $859.72.