Finance

Google’s reporting is becoming too murky to accurately value the company’s financial performance, worries this Wall Street analyst (GOOGL, GOOG)


Alphabet Inc, Google’s parent company, must become more transparent about the company’s financial performance if investors are to have any chance at accurately valuing the company, according to one Wall Street analyst.

Against a backdrop of mostly positive expectations for Google heading into Monday’s quarterly earnings report, Ben Schachter senior analyst at Macquarie Research, stood out for taking a much more cautious approach to the company’s shares.

“We are increasingly frustrated with the lack of visibility into GOOG’s core revenue drivers, and valuation is starting to become an issue,” Schachter wrote in his report. “However, with revenues growing (at 20 percent year from last year) , we don’t think Google is wildly expensive, but see upside as limited.”

Schachter has a neutral rating on Alphabet’s shares.

Getty / Chip Somodevilla

A lack of transparency about Google’s financial performance has long been a complaint on Wall Street, and Schachter argues reporting is less clear than ever.

He wrote: “We are approaching a point where we, and we believe The Street collectively, are not understanding the size of search vs YouTube vs programmatic (advertising), which may lead to increasing volatility.”

And that wasn’t his only problem. In his report, the analyst called attention to the excitement on Wall Street over the potential growth of some of Google’s side businesses. This presumably includes Waymo, Alphabet’s autonomous car operation, which has taken an early lead in the nascent self-driving car market.

Google has invested heavily in businesses that managers hope will one day be on par with search advertising, the company’s bread-and-butter business. Wall Street too is eager for Google to diversify, a means to ensure the company can better weather any downturns in advertising as well as remain a growth story among investors. But Schachter pointed out that in terms of revenue, most of these bets have yet to pay off.

“Advertising today still represents 86% of revenues,” the analyst wrote. “In our view, while there have been innumerable notes, articles, and discussions posted about all the fascinating technologies that Google is pursuing the single most important driver of the stock over the past five years is related to the number of ads it shows in its mobile search results.”

Most financial analysts say they believe that Wednesday’s big news, the $5 billion fine imposed on Google by the European Union, represents little to no threat to the overall health of Google’s business in the short- and medium- term.

Beyond that timeframe, there are some concerns that some of the restrictions imposed on Google by the EU could benefit some of Google’s competitors. The EU’s competition watchdog demands that Google end or alter several trade practices.

European regulators claim Google forced manufacturers to pre-install its browser and search apps on their mobile devices, and also paid manufacturers to exclusively preinstall Google search. According to the EU, this stifled competition. Google also allegedly broke the law by preventing device makers from running alternative versions of Android — known as forks — that would enable owners to run derivative software, such as Amazon’s Fire OS.

Many on Wall Street were unimpressed with the allegations or the fine.

“We view the European Commission’s ruling against Google as a bit misguided, but likely a relatively minor inconvenience in the short and medium terms,” wrote Colin Sebastian, senior research analyst for Baird Equity Research. “Longer term, we see modest (but not unexpected) added risk from requirements to support forked versions of Android, and secondly, from the direct and/or indirect benefits of this ruling for Apple and Amazon.”

As for the other growth areas in Google’s business, such as advertising, cloud enterprise and retail, they appear to be running smoothly, according to analysts.

John Blackledge at Cowen Equity Research wrote Wednesday that his firm spoke to a digital advertising agency that spends $1 billion in US digital advertising “across paid search and paid social channels.”

That ad agency told Cowen that spending on Google search was up between 15% to 20% due in part to strong demand for mobile, and the growing number of ad impressions.

Blackledge wrote that according to its ad agency source, “mobile continues to drive Google Search spend.”

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