'OK Google,' How Will Alphabet Perform In Q3?

Optimism abounds concerning Alphabet Inc GOOGL GOOG's fiscal third-quarter results, with Credit Suisse's checks revealing that the core search business is trending well and YouTube is faring better.

The company is scheduled to report its quarterly results after the market close on Oct. 26.

Credit Suisse reiterated its Outperform rating on the shares of the company, while it lifted its price target from $1,100 to $1,350, suggesting roughly 37 percent upside from current levels.

The firm clarified that its DCF-derived end-of-2018 price target of $1,350 uses a 10-percent weighted average cost of capital and 3-percent terminal growth rate.

At the time of writing, Class A shares of Alphabet were up 0.87 percent at $996.40.

Analyst's Take

Analysts Stephen Ju and Christopher Ford raised their Network estimates, with the adjusted earnings per share estimate increased from $42.14 from $42.31.

The analysts said their conversations with advertisers suggested minimal search budget growth deceleration, coupled with potentially accelerating spend on YouTube.

Credit Suisse believes the momentum in the search business is due to continued increase in mobile search traffic, higher cost-per-clicks, or CPCs, due to greater usage of location-based targeting for brick-and-mortar retail operators and the ongoing benefits from Expanded Text Ads, particularly for overseas advertisers.

Meanwhile, the firm sees the buoyancy in YouTube offtake as due to the return of advertisers who pulled spending in the first half of 2017, accelerating budget deployment to YouTube.

The firm said its investment thesis for Alphabet shares is premised on a trio of factors, namely:

• The ongoing monetization improvements in Search through product updates such as Expanded Text Ads and Individual Bid Adjustments.
• Increased contribution from non-search businesses such as YouTube, Google Play and Cloud.
• Optionality presented by new monetization initiatives such as Maps and eventual commercialization of Google's Other Bets such as Waymo, Life Sciences, etc.