Google Cloud Likely To Exhibit Strength And Margin Boost As Search Engine Growth Softens, Analyst Says Ahead Of Q4

Raymond James analyst Aaron Kessler maintained Outperform on Alphabet Inc (NASDAQ: GOOG) and reduced 

Raymond James analyst Aaron Kessler maintained Outperform on Alphabet Inc (NASDAQ:GOOG) and reduced the price target from $120 to $116.

The analyst expects relative strength in Google Search with easing comps throughout 2023.

Kessler expects continued Cloud strength with improving margins in 2023 and 2024.

Improved financial discipline and headcount reductions position Google for solid operating leverage in 2024.

Based on Kessler’s sum-of-parts analysis, the analyst believes the valuation is attractive at ~15x core Google Services Net Income.

Google Search Growth: Kessler modestly lowered his 4Q Google Search & Other estimate to $43.3B, which aligns with Street. 

The analyst expects little growth courtesy of tough Y/Y comps, currency headwinds, slower macro (mainly Europe), and spending in specific verticals (Google called out financial services in 3Q). 

YouTube: Kessler estimates YouTube revenues of $8.2B in 4Q. 

The analyst expects continued headwinds in 4Q across brand and direct response advertisers, with DR impacted partly by ad privacy headwinds. 

Analyst checks suggested continued softening of YouTube ad revenues in 4Q, given softer brand advertising demand and continued ad privacy headwinds. 

For 2023, the analyst modeled 4% revenue growth with expected recovery to mid-high single digits in 2H.

Google Cloud Growth and Margins: Kessler estimates 4Q Google Cloud revenue of $7.4B. For the quarter, the analyst would also focus on Google’s Revenue backlog (primarily related to Google Cloud). 

The analyst expects Google Cloud margins to be an increasing point of focus for the company and investors alike in 2023. 

Estimate Changes: Kessler modestly adjusted estimates to reflect slower revenue growth expectations, while EPS estimates increased slightly for 2023 to reflect recently announced headcount reductions. 

For 2023, revenues decreased by 1.5% to $249B, while the EPS estimate increased by 1.5% to $5.02. 

The analyst introduced 2024 revenue and GAAP EPS estimates of $269B and $5.64.

Price Action: GOOG shares traded lower by 1.82% at $99.38 on the last check Tuesday.

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