Alphabet Inc. delivered stronger-than-expected first-quarter results, reflecting the continued resilience of its core search business.
Analysts warn that despite the positive numbers, the stock may not continue to rise, as the macroeconomic background and the market’s increasing reliance on headlines over fundamentals is a concern.
Alphabet shares rose by 1.7% on Friday. Class A shares gained 2.3% and Class C stocks increased by 2.3%.
YouTube revenues increased 10%, a figure that exceeded Wall Street’s expectations.
The bigger question is: Will such a beat suffice?
Market sentiment remains fragile despite strong numbers
Mark Shmulik, Bernstein Research’s analyst, noted that Alphabet had “delivered an exemplary quarter”, but remained skeptical of the stock price trajectory.
In a letter to his clients, he said: “It is too soon to celebrate victory.”
He said that Alphabet’s fundamentals were solid, and that investors are being distracted by headlines about geopolitics, as well as fears of an economic slowdown.
Alphabet’s estimates have already been reduced in the last six weeks because of concerns about rising tariffs, and their possible impact on global trade.
Alphabet’s Sundar Pichai, the Chief Executive of Alphabet said in the call to discuss the results that changes made to the de minimis exemption will have a slight impact on ad revenues this year. This is primarily due to Asia-Pacific.
It comes as digital marketers are struggling with the economic uncertainties and changing consumer behavior.
Alphabet did not provide much clarity about how macro-changes could impact performance over the next few quarters, despite the success of its YouTube and search businesses.
During the call for earnings, depreciation, stock-based compensation and legal disputes were all mentioned as headwinds that could affect margin improvements.
Ad outlook uncertain but search resilience welcomed
UBS Securities said that Alphabet’s superior performance in digital advertising would be a reassurance to investors who had placed their money on the company’s comparative strength.
In a note, UBS analysts including Stephen Ju wrote: “Investors were hoping for greater resilience from search compared to the rest of digital ecosystem in order to withstand a more severe macro-drop.”
The beat is seen to confirm this opinion.
UBS believes that Pichai’s admission that de minimis would be a drag on ad revenues is likely to increase concerns about the overall trend of growth for the digital sector.
Alphabet is still committed to long-term growth.
Anat Ashkenazi, Chief Financial Officer of the Company, said that the company will continue to aim for $75 billion capital expenditures in this year. UBS took her words as a sign of confidence about the outlook on revenue.
Her plans also include managing costs and headcount related expenses to offset the rising depreciation due to capex.
Analysts increase price targets, but warn that stock prices will continue to be under pressure
Bernstein reiterated its market-perform ratings on the stock, and increased their price target from $165 to $185. This suggests that there is limited upside potential from the current level.
Shmulik wrote that “no guidance” means there is no need to highlight risk beyond the information on paper.
We wouldn’t be shocked to see profit-taking in this name with the nice recovery of the share price from the bottom in recent weeks.
UBS increased its target to $186, up from $173. It maintained a neutral position.
UBS stated that Alphabet’s stock could still be under pressure, citing the regulatory uncertainty and pressure from competitors in its core business areas.
Shmulik, a Bernstein analyst, concluded that this could be the “best it can get” for Alphabet, particularly without forward guidance.
Strong earnings may not suffice to keep the market moving in a volatile environment due to trade tensions, inflation and rising interest rates.
The post Alphabet Earnings Beat, But Analysts Say the Numbers May Not Add Much to Stock: Read Why may be updated as new developments unfold.
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