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Alphabet's Large Investment Spend Is Justified, KeyBanc Says

Alphabet's Large Investment Spend Is Justified, KeyBanc Says

Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) signaled in its first quarter earnings report that it's in the middle of a heavy investment period. This shouldn't necessarily be of concern to investors, according to KeyBanc.

The Analyst

KeyBanc Capital Markets' Andy Hargreaves maintains an Outperform rating on Alphabet with a price target lowered from $1,280 to $1,230.

The Thesis

Alphabet's cost of revenue, operating expenses and capital expenditure stood at $25 billion in the first quarter, which represents a 57 percent uptick from the same quarter a year ago, Hargreaves said in a report. This is "extraordinary," but at the same time the large investment dollars solidifies Alphabet's positioning within large addressable markets like streaming video, self-driving cars, hardware and health care. As such, an elevated spending is justified, especially as the company could sustain growth rates "well ahead" of consensus estimates.

Here are some of the other highlights in Alphabet's quarter:

  • Gross advertising revenue grew 24.4 percent from a year ago to $26.6 billion.
  • TAC was 23.7 percent of gross add revenue versus the analyst's estimate of 23.2 percent.
  • EPS of $13.33 included a $3.40 per share benefit from equity investment gains.
  • Adjusting for the Waymo settlement, the analyst estimates Alphabet's EPS would have been $9.58 versus his estimate of $9.68 per share.

Price Action

The stock was trading slightly lower Tuesday morning at $1,073.81

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