Exane hits sidelines on Alphabet amid ad pressures, rival headwinds
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Exane has downgraded Google parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) to Neutral from Outperform, embracing the growing economic concerns weighing on the advertising industry and reflecting some outperformance in the past 18 months.
The BNP Paribas firm's proprietary ad tracking system is turning incrementally negative on the macro backdrop and high inflation, and it's cut its Q2 ad revenue estimates, leaving it about 4% below consensus there.
It's not just the economy, though, analyst Stefan Slowinski said: "Lower app store fees, opening up of in-app payment systems and FX headwinds are impacting revenues."
Margins might be "squeezed" near-term with operating expenditures ramping alongside slower revenue growth, and a meaningful increase in capital expenditures is expected to press on free cash flow, he points out.
Meanwhile, YouTube is now seeing higher competition in short video (with TikTok) as well as the industry's challenge navigating Apple's iOS privacy changes. And added uncertainty comes from some key senior departures (its Google Cloud president, head of commerce, head of workspace & messaging) and regulatory pressure (possible DOJ antitrust suit, probes in the UK and EU).
Alphabet is likely to see long-term structural growth with strong technology moats, but it's not headed for outperformance in the near term, Slowinski says; he's cut 2022 EPS by 1% and 2023 by 3%, and valuing the company on 6% fiscal 2023 free cash flow yield brings a target price for GOOGL of $118 (down from $150), vs. a current $113.61.
Alphabet (GOOG) (GOOGL) reports its Q2 results after the close on July 26.