MorningWord 1/27/17: $GOOGL – Click Clack Move

by Dan January 27, 2017 2:48 pm • FREE ACCESS

Yesterday we had a short preview of Alphabet’s (GOOGL) Q4 results (here) and updated a prior bullish trade idea from early December that targeted a new all time high. The results are out, and the stock is down slightly as the company missed their $9.67 eps estimate by 3%. Their costs increased due to a ramp up in products like their Pixel phone, Digital Home Assistant and cloud offerings. Those costs masked total sales beating consensus estimates. Their “other bets” saw revenues grow 62% year over year, which should be encouraging as the company diversifies away from its core search advertising business.

One sticking point for investors is the decline in cost per paid click. That declined 15% year over year in Q4, and it’s an acceleration from the prior quarter’s 11% decline. But that amidst an acceleration in paid clicks themselves in the quarter. That points back to  YouTube, whose ads are monetized at a worse rate than core search results.

And that leads me to an important point made by Business Insider’s Steve Kovach about platform changes to mobile and voice, and the potential for lower monetization rates going forward:

Wall Street analysts cut right to the chase, asking Google executives whether the company was at risk from the growing popularity of voice-enabled devices, which lack the screens on which Google’s online ads rely.

Google CEO Sundar Pichai sought to tamp down the concerns, telling analysts on the call that Google was “comfortable” about the way things would play out over the coming years.

But Pichai didn’t provide any details about how Google planned to evolve its ad business into the world of voice-based computing.

Instead, he tried to assure his audience that the threat wasn’t as big as some might expect. Sure, voice-enabled gadgets like the Amazon Echo and Google’s own Home device don’t have screens — eliminating the online ads that account for the vast majority of Google’s revenue.

But in Pichai’s view, that doesn’t necessarily mean screens are going away altogether.

Voice will be only “one mode,” he said. “Users will have many different ways by which they interact” with computers.

It’s still “early days” for voice-based computing, Pichai added. And he stressed that Google’s years of experience working on natural language search and speech recognition gave his company a big edge over the competition.

For the time being, GOOGL investors should be able to take solace in the fact that the stock trades 1x its expected 2017 eps growth of 21%. It’s safe to say that there are few stocks in the history of the stock market with mega-cap status ($581 billion, and the 2nd largest company in the world by market cap) that trade at a PE/G of 1.  And that’s in an environment where sales are expected to increase 18% on a massive revenue run rate ($74 billion trailing, $87 billion forward). But if Q1 paid clicks start to show a trend, and the company continues with the “trust us” on the threat of voice search on other devices like Alexa, and lower monetization rates, all bets are off.

To my eye, the stock’s 10% run over the last month into the print set the stock up for a near term disappointment without a meaningful beat and raise, and a pullback to the $800 – $750 support level could not only be in the cards, but could set up as a great reload period for longs looking to book some profits:

GOOGL 2yr chart from Bloomberg
GOOGL 2yr chart from Bloomberg