Alphabet’s latest quarter looks ‘TACky’ due to Google parent’s traffic acquisition costs

Shares in Alphabet Inc. slumped in premarket action Tuesday, even after the Google parent posted better-than-expected quarterly results late Monday.

Analysts have focused on negatives in the search giant’s second-quarter earnings release, especially its higher traffic acquisition costs, or TAC. That refers to what the company shells out to draw people to its online properties and ads.

It was a “TACky 2Q, but long-term growth and earnings power inTACt,” said pun-loving Morgan Stanley analysts in their note.

“Higher mobile traffic acquisition cost (TAC) speaks to the lower underlying margin of GOOGL’s most important growth engine,” wrote the Morgan Stanley analysts, led by Brian Nowak.

They lowered their price target for shares that trade under the GOOGL ticker

GOOGL, +0.45%

 to $1,040 from $1,050, but maintained their overweight or buy rating. Those shares recently fell 2.5% premarket to about $973. The dual-listed company also has shares that trade under the GOOG ticker

GOOG, +0.76%


“Tactical bears may pick at the higher traffic acquisition cost (and we acknowledge this thesis held back GOOGL’s share price performance in 2016), but we remain long-term bulls given GOOGL’s strong top-line momentum and reasonable valuation for growth,” Nowak and his colleagues wrote in a note.

“2Q TAC was ~6% (~$290mm) higher than expected driven by the strength of mobile search and GOOGL’s programmatic business,” they added. “While this investment weighs on near-term profitability, it is important to remember that these investments are what enable GOOGL to continue to grow.”

Read: Alphabet reports second-quarter earnings beat

And see our live blog recap: Alphabet falls after earnings beat

KeyBanc Capital Markets analysts have made a similar point, saying Alphabet’s “profit growth outlook remains strong despite growing TAC.”

They have reiterated their price target of $1,100 and their overweight rating, suggesting investors buy the dip this morning.

“We recommend adding to GOOGL positions on any near-term pullbacks relating to TAC uncertainty,” said the KeyBanc team, led by Andy Hargreaves.

Now read: Alphabet earnings keep Google investors in dark

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