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Jim Cramer's Action Alerts PLUS

Alphabet Delivers Top and Bottom Line Beat

By Jim Cramer and the AAP Team | 2018-04-23 19:35:34.0
Stocks in Focus: GOOGL

Alphabet (GOOGL) reported its first quarter results shortly after the bell on Monday, beating on both the top and bottom lines. Revenues of $31.15 billion (up 23% year over year in constant currency) came in ahead of the consensus of $30.29 billion, and adjusted earnings per share of $9.93 (up 28% year over year) topped the consensus of $9.28. After a disappointing miss on the bottom in the company's fourth quarter 2017 result, this quarter's strong beat was a welcomed improvement. Operating margins continued to decline, however, falling to 22% in the first quarter of 2018 from 27% in the first quarter of 2017. 

Digging deeper into the report, revenue in Google Properties (formerly labeled "website"; in other words, the core business) increased 26% year over year to about $22 billion, a consensus beat of approximately $750 million. Google Properties strong top line result also reflects an acceleration from Alphabet's fourth-quarter 2017 number. Mobile Search (a cause of the rising TAC) continues to be a major source of growth, and management sees Mobile as a long-term driver of profits. Also, management acknowledged strong performance in YouTube this quarter. Alphabet has been focused on investing in new ways to enhance the YouTube user experience, and Beyoncé's recent Coachella performance was the most viewed event ever on YouTube. As for abuse on the platform, management is committed to cracking down on abusive content through strict policies, and they have been making progress in identifying and removing content before it is ever seen. Google Network Member properties revenue came in at $4.6 billion (up 16% year over year), topping expectations of $4.5 billion. Driving the quarter was continued momentum of programmatic and AdMob.

Google Other revenue, which includes Pixel sales, cloud services, Nest (which was previously in Other Bets), and Google Play, was $4.35 billion (up 36% year over year) in the first quarter, beating estimates of about $4.26 billion. In the Cloud, Pichai noted that after passing $1 billion per quarter in 2017, momentum has increased to start 2018. On the conference call, Pichai said that Google's cloud business is growing across its group of products, and revenue growth at the G Suite, which Pichai said can now meet all the needs of a large enterprise, accelerated in the first quarter.

Lastly, the Other Bets segment, which covers businesses such as Waymo, Google Fiber, and Verily, reported an operating loss of $571 million on $150 million of revenue. This represents a solid improvement year over year as revenues increased by $18 million and operating loss improved by $132 million. Driving revenue this quarter was Verily and Google Fiber, and as for Waymo, CFO Ruth Porat noted that the autonomous driving technology platform has achieved 5 million miles of driving on city streets, with the latest million taking just 3 months. After the fatal Uber crash earlier this year, many investors had become wary about the future of this industry, but Waymo's mileage achievements, recent partnership wins, safety track record, and its continued push to develop its industry leading technology all represent positive signals for this opportunity.

Taking a look at some of the core operating metrics, paid clicks on Google Properties, which is a measure of the number of ads sold, increased 59% year over year and 8% sequentially. The impressive year over year growth came in ahead of what analysts expected. Cost per click on Google Properties, which is essentially ad prices, declined 19% year over year and 7% sequentially. Paid clicks on Google Network Members' properties increased 37% year over year and 29% sequentially. Cost per pick on Google Network Members' properties declined 17% year and year and 21% sequentially. As for traffic acquisition costs (TAC), or essentially what Alphabet pays partners to support its advertisements, total TAC came in at $6.29 billion. Total TAC as a percent of Google advertising revenues was 24%, an increase from 2017's result of 22%. The trend of rising TAC is very consistent with both previous quarters and management's commentary as mobile search and programmatic, two of the strongest areas of growth for Alphabet, inherently carry higher TAC. Management has endlessly foreshadowed that this will be a theme for Alphabet going forward as they favor the potential that Mobile brings over margins concerns. Despite this, rising TAC has spooked investors in the past, and although TAC is expected to continue to increase as a percentage of site revenues because of mobile search, Porat said on the conference call that the "pace of year over year growth in sites TAC as a percentage of sites revenues will slow beginning in the second quarter."

Overall, it was encouraging to see the company rebound from last quarter's disappointing earnings result with a strong beat on the bottom line, however, just like quarters in the past, we believe the muted after-hours reaction to the print relates to uneasiness over rising TAC. The bears will point to this as a signal that profitability growth may become unsustainable in the long run, however we believe that the vast opportunities that Mobile brings with it mean this is just a necessary evil, and Alphabet's push into the Cloud and Hardware represents two additional paths of diversification away from search. Regarding the cloud, though we had hoped for more color on the company's operations and its revenue growth, we'll take the commentary about broad momentum and revenue acceleration in the G Suite as a positive sign that the business is healthy. Also, no disruptions to Waymo, which represents more of a "moonshot" project but in an industry that has gained in visibility, is encouraging as well. Bottom line, after a quarter of strong top line growth and strong beat on the bottom line, we reiterate our price target and our One rating.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long GOOGL.

Trimming Magellan Midstream
Stocks in Focus: SLB, MMP

Raising cash ahead of two possible market-swoon catalysts.

04/23/18 - 02:49 PM EDT
Jim's Daily Rundown
Stocks in Focus: FB, GOOGL, AAPL, GD, TXT, EMR, EBAY, ETSY, AMZN, SLB, APC, APA, MMP, HON, PEP, RTN, KSS

In today's daily rundown, Jim discusses keeping cash ready, tariff moves, Facebook, Apple and more.

04/23/18 - 12:45 PM EDT
Weekly Roundup
Stocks in Focus: UNH, GS, ABT, NUE, DHI, HON, SLB, DWDP, MSFT, ITW, GOOGL, LLY, MMM, CMCSA, FB, PYPL, PEP, RTN, AMZN, AAPL, DRI, EMR, JPM, KSS, AVGO, C, DHR, NVDA, AGN, MMP, XEC, STZ, JWN

Markets give up some gains Thursday and Friday, ahead of heavy earnings next week.

04/20/18 - 07:23 PM EDT

Markets

Chart of I:DJI
DOW 24,448.69 -14.25 -0.06%
S&P 500 2,670.29 +0.15 0.01%
NASDAQ 7,128.6014 -17.5244 -0.25%

Action Alerts PLUS Holdings

Holdings 1

Stocks we would buy right now

Symbol % Portfolio
Weighting
Industry
AAPL 0.027953408970064656 Telecommunications Equipment
DRI 0.010268530165110897 Restaurants
GOOGL 0.02825742362664621 Internet Software/Services
JPM 0.025021154337523378 Financial Conglomerates
PEP 0.019281453859364375 Beverages: Non-Alcoholic
STZ 0.03217867511653231 Beverages: Alcoholic
UNH 0.01761909104076213 Managed Health Care
XEC 0.02598174967724147 Oil & Gas Production
Holdings 2

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Industry
AVGO 0.013164131614745408 Semiconductors
C 0.02481364093275892 Financial Conglomerates
DHR 0.03614191799647672 Medical Specialties
DWDP 0.03144279198278878 Chemicals: Major Diversified
FB 0.029613516208180334 Internet Software/Services
ITW 0.0206047277448189 Industrial Machinery
MSFT 0.03584493323241164 Packaged Software
NVDA 0.012624483983333485 Semiconductors
SLB 0.033676944454736575 Oilfield Services/Equipment
Holdings 3

Stocks we would sell on strength

Symbol % Portfolio
Weighting
Industry
AGN 0.006010746066628523 Pharmaceuticals: Generic
MMP 0.01255982400938514 Oil & Gas Pipelines