Alphabet Will Likely Post In-line Or Slightly Better Than Expected Q1 Earnings, Analyst Says Based On Positive Catalysts

Credit Suisse analyst Stephen Ju reiterates an Outperform rating on Alphabet Inc GOOG GOOGL Google with a price target of 136.00.

The analyst previews Google's 1Q23 results in a Thursday note titled "YouTube Engagement Remains Steady, Adjusting for Near-Term Brand Weakness." 

Ju's 2023 and 2024 adjusted EPS estimates remain unchanged as he takes steps to recalibrate his assumptions. Given its size, advertising spending on Google most reflects the state of the overall economy vs. other companies in Ju's coverage, which may have more vertical-specific exposure. 

Ju's conversations with advertisers suggest that strength in specific verticals (travel in particular and entertainment/media) is offset by weakness in others (auto, real estate, financials, insurance). 

At this point, the analyst does not have reasons to believe that his estimates for online advertising for 2023 should increase as budget growth expectations seem bracketed to a 0-5% range, consistent with the feedback he had gathered heading into the 4Q22 earnings cycle and vs. ~5-7% back in Sep/Oct 2022. 

In the near term, his checks are pointing to an in-line to slightly better result for Search in 1Q23. The analyst notes that Performance Max went into general release in 4Q21, so he started to lap some benefits. 

His 2023 FXN growth projections for Search and Other stands at ~3.4% (2.3% reported) and YouTube at 4.0% (2.0% reported). 

Feedback for YouTube remains soft, given higher brand exposure. Ju also updates engagement and time spent data, and the time series continues to suggest that YouTube has effectively triaged the potential challenge from the proliferation of TikTok. 

The re-rating reflects ongoing monetization improvements in Search through product, AI updates, greater-than-expected revenue contribution from non-Search businesses (YouTube, Cloud, and Play), optionality and shareholder value creation from new monetization initiatives like Maps, Discover, and commercialization of Other Bets.

Price Action: GOOG shares closed lower by 0.57% at $101.29 on Thursday.