Truist analyst Youssef Squali re-rated Alphabet Inc
Healthy user engagement online drives more ad spending and favors the mega-platforms, although growth is skewing to impressions rather than pricing, given marketers' continued focus on ad efficiency.
Squali expects 3Q results for all three Buy-rated names to be virtually in line with expectations, with cost containment driving higher Y/Y margins and profitability.
Conversations with digital ad agencies suggest that demand has improved Q/Q across Search and Social, while Retail Media has maintained its strong momentum. He expects a muted 4Q guide, given the uncertain macro.
Squali expects GOOGL (Buy; price target $160) to show relative resilience in 3Q amid an uncertain macro environment and higher rates.
The consolidated gross revenue should be up +8% Y/Y in 3Q vs. 7% in 2Q and 3% in 1Q and implies +7% Y/Y growth in global Search, +14% in YouTube and +24% in Cloud. He expects overall % operating margins (as a % of gross revenue) of 28% in 3Q, up from 25% a year earlier but down from 29% in 2Q23.
He expects Google to remain on the offensive with AI investments, including in Bard (text-generative chatbot) and Gemini (latest LLM).
He notes the critical differentiator between Gemini AI and OpenAI (private) GPT-4 is that Gemini AI has access to proprietary training data from Google Search, YouTube, Google Books, and Google Scholar, which could create an edge.
Squali projects 3Q revenue of $74.8 billion vs. consensus $75.9 billion. EPS estimates of $1.46 compared to consensus of $1.44.
Squali expects $33.5 billion in META (Buy; price target $390) in revenue for Q3, towards the mid-point of management's guidance and virtually in line with the Street consensus of $33.4 billion.
His $11.5 billion operating income and GAAP EPS of $3.75 are ahead of consensus estimates of $3.59.
The growth in user engagement, especially at Instagram, remains highest among peers, and several macroeconomic indicators, including consumer spending and U.S. non-farm payroll reports, show that the consumer remained relatively resilient throughout 3Q23, which bodes well for digital ad spending.
Meta continues to progress in reversing the significant IDFA effects, which should be an incremental positive for growth throughout 2023.
Squali revised AMZN's (Buy; price target $174) 3Q23 top-line estimates for North American revenues to reflect his latest reading of the Truist Card Data, which indicates that NA revenues are tracking in line with slightly below consensus of $85.9 billion.
As a result, the analyst now expects NA revenues to be $84.7 billion (+7.4% Y/Y) vs. $87.5 billion (+10.9% Y/Y) previously and vs. consensus of $85.9 billion.
On the other hand, Squali increased his estimates for Ad Services revenue growth to +22% Y/Y from +18% Y/Y previously due to conversations with media buyers.
For Q3 consolidated revenues, he now expects total revenues of $138.3 billion vs. $141.1 billion previously and vs. consensus of $141.5 billion. Squali expects International revenues to be $30.5 billion vs. consensus expectations of $32.0 billion. For AWS, he expects revenue growth of ~13% Y/Y (to $23.2 billion), in line with consensus and vs. 12% and 26% Y/Y in 1Q and 2Q respectively.
Such a performance would imply that AWS growth troughed in 2Q23, which would be a positive catalyst for the stock.
Price Actions: GOOG shares traded higher by 0.17% at $140.73 on the last check Tuesday.
