KeyBanc Initiates Alphabet (GOOGL) with an Overweight Rating

Kareem Winters

On Monday, Analysts at KeyBanc initiated coverage on Alphabet (GOOGL) with an Overweight rating and $1,955 price target, representing 13.7x 2022E EV/EBITDA. So what are analysts saying?

Analysts suggest that Alphabet's advertising platform can support >10% annual revenue growth and also see success and growth in the company's Google Cloud Platform.

That said, Google Cloud does represent a lower margin revenue streams and as a result could pressure overall margins as it increases its share of total company revenues. On the other hand, operating margins are expected to trend up (back toward 40%) as "expense headwinds from Cloud begin to moderate". 

The coronavirus pandemic has pushed the world into a stay at home environment with many of the top tech companies allowing their employees to work from home. The trend has served to accelerate the cloud based software market as a whole.

Along with the cloud, the analysts see increased potential in Alphabet's YouTube operation calling out that "using Google Trends as a proxy for traffic, YouTube averaged ~4.5x more searches than Netflix over the past 6 months. Across geographies, YouTube is consistently the most searched for video site." Moreover, the analysts noted that "YouTube accounts for ~7% of worldwide video advertising dollars – given the substantial reach and engagement, [they] believe YouTube is materially under-monetized today."

Despite increased optimism, analysts also highlighted some risks, including upcoming regulatory interference & advertising competition. Google is constantly competing for direct response traffic and brand advertising dollars with the other large cap companies (think Facebook and Amazon) which could lower the company's total market share. On the regulatory side, the upcoming tax imposed from the European Union (EU) could also hurt revenue expectations.

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Disclosure: At the time of publication, I am long Alphabet and Amazon. I do not have exposure to Facebook. I wrote this article myself and it expresses my own opinions. I am not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article. 

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Comments (1)
No. 1-1

Google has the right idea with the cloud services. I just don't see people, especially businesses, moving completely from Microsoft to Google which could impact them in the long run.