Alphabet: Not As Bad As It Seems

| About: Alphabet Inc. (GOOG)

Summary

Q1 earnings was actually solid when looking at organic growth and cost control.

Its near-term focus on AI and machine learning is a key differentiator.

The long-term differentiator remains the "Other Bets." Buy on weakness.

The headline numbers from Alphabet (GOOG, GOOGL) certainly did not impress investors, but I thought the company reported a solid quarter with FX-adjusted revenue growth of +23% y/y, which is impressive given GOOG's revenue run rate of $80 billion. Consistent with my prior view, cost control was better than expected, and this delivered a solid operating margin. More important, mobile search saw improving monetization, while YouTube and programmatic all delivered strong growth. Although the rising mobile TAC and the potential slowdown in the second half may weigh on the stock, I believe the longer-term outlook for GOOG in stable organic growth, followed by attractive catalysts from the "Other Bets" will offset this concern. The stock was down 5.5% after the earnings announcement, and I would buy on weakness.

Contrary to the headline numbers, there are things to cheer about in GOOG's earnings. Besides the solid FX-adjusted revenue growth, mobile search, YouTube and programmatic, international revenue remains solid, with UK +21% and rest of the world +25%. Cost controls drove the better-than-expected operating margins, and Other Bets-adjusted loss declined substantially by $447 million q/q.

Perhaps what I found most interesting was GOOG's increased focus on artificial intelligence (AI) and machine learning. It is worth highlighting that this is an area Baidu (NASDAQ:BIDU) is also focusing on. GOOG has invested a lot in machine learning, and it was evident in AlphaGo's performance against Lee Sedol. I believe GOOG's victory over Lee was an important milestone for AI, and this is another stepping stone where AI could potentially transform people's lives (or replace jobs across a wide range of sectors) in the years to come. Machine learning is already contributing to GOOG's existing products in photos, map, email, calendar, search and even fitness. Ongoing investment in AI will further enhance the company's ecosystem, and this will be critical for GOOG as it battles against Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) as internet giants look to expand their ecosystem penetration.

On the content side, YouTube and Google Play are gaining momentum. YouTube, particularly, has had a great run and now reaches more 18-34 and 18-49 year olds in the US than any other traditional TV network, broadcast and cable. Simply put, TV as we know it is being replaced by OTT providers, and YouTube is certainly at the forefront of this media consumption shift with its original programming, virtual reality viewing and 360-degree streaming.

Finally, Google Play is becoming a key hug for apps, games, music, movies and other multimedia products. The Play Store is already reaching over 1 billion users globally, and last year, we saw +50% more games reach over 1 million installs than the prior year, suggesting that GOOG's ecosystem is expanding.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.