Alphabet: Ad Market Slowed In Q3 But Costs Have Not Yet Adjusted

(Preview) Company Update (GOOG US) (Buy)

Summary

• Alphabet/Google shares fell 6% after-market on Tuesday, after Q3 results showed Advertising revenue growth slowed to just 2.5%.

• Currency was a 5 ppt headwind, and Advertising revenues did grow 43% last year, but there was a genuine slowdown in ad demand.

• EBIT fell 18.5% in Q3 as cost actions have not yet had an impact. Net Income fell 26.5% due to mark-to-market investment losses.

• On 2021 financials, Alphabet shares have a 15.6x P/E and a 4.1% Free Cash Flow Yield. We expect EPS to fall 22% in 2022 then rebound.

• With shares at $98.37, we expect an exit price of $240 and a total return of 144% (32.3%annualized) by 2025 year-end. Buy.

Introduction

Alphabet reported Q3 2022 results after markets closed on Tuesday (October 25). Shares fell more than 6% in after-market trading, with Class C shares finishing the session at just 3% above their 52-week low.

We initiated our Buy rating on Alphabet in January 2021. Class C shares have gained just 3.6% since then, after a decline of 32.0% year-t…