Should Investors Worry About Rising TAC When It Comes To Alphabet Inc (GOOGL)?
Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL)’s market cap topped Apple Inc. (NASDAQ:AAPL) on Thursday to become the biggest company as far as market cap is concerned. This is the second time that the search engine crossed the iPhone maker’s market cap in the current year. In any case, both are trading below the $500 billion market cap because of worries in connection with their business models. One of the worries for the Android device maker is the spending towards traffic acquisition costs (TAC) that is growing year after year as the company appears to be commanding less ad rates. Should this be a big concern to investors to worry investing in it or is there an alternate source of revenue generation to feel comfortable in spending more on TAC? Let’s look at them and the valuation and see the reason to hold the stock as a blue chip one.
Solid Ad Growth In 1Q
If some of the key metrics were taken into consideration, Alphabet Inc (NASDAQ:GOOGL) delivered a strong top line, as well as, the bottom line. Its revenue grew 17% while earnings jumped 16%. Its other stream of revenue such as Fiber or Google Play witnessed 24% growth. However, the results were viewed differently by different people. Some analysts felt that the results were below their expectations as the industry has been generating more than 19% average growth of the last three-year period. As a result, the traders and investors punished the stock following the quarterly numbers disclosure. However, the question is whether it is fair to dump the stock now.
Alphabet Inc (NASDAQ:GOOGL) plays a key role in contributing to the industry growth as it enjoys nearly one-third of the digital ad market. The size of its business generation is bigger than its rivals like Facebook Inc (NASDAQ:FB). That is also playing its part to hurt its growth percentage. For instance, the search engine delivered $74.99 billion revenue for the year 2015 whereas the social media firm’s revenue was $17.93 billion for the same year. Therefore, a section of analysts and investors believe that it was a strong start though the company needs to look for additional sources of revenue to bridge the gap.
Worries On TAC
When the results of Alphabet Inc (NASDAQ:GOOGL) miss expectations and TAC grows, there is a natural worry whether it is worth spending more on TAC, which is nothing but the amount paid to run Google Ads and services. If TAC is looked at on a YOY basis, it recorded 13% increase and 21% of the total ad revenue. However, on a sequential basis, the company spent 7% less on TAC. The higher TAC was due to the mobile and programmatic. The search engine giant could not be blamed on spending more on mobile as the market is shifting towards mobile. If the company fails to go along with the trend, then it would only be the sufferer. Therefore, the increased TAC could be justified to defend its revenue growth or shifting of ad revenue to mobile.
Also, Alphabet Inc (NASDAQ:GOOGL) only took a wise decision to shift towards the mobile. The kind of growth that smartphone witnessed is phenomenal, and the usage of it is getting expanded periodically. The telecom service providers are also doing their part to offer speedy download of video or data. Therefore, the usage of the mobile will get accelerated in the upcoming years and not likely to get bogged down. As such, the company felt justified in increasing the TAC costs. Also, the sequential drop suggested that ad rates are getting healthier than what it was earlier.
Global Ad Market Intact
As long as the ad market remains strong, investors need not have to worry about Alphabet Inc (NASDAQ:GOOGL) spending more on TAC. Currently, the search engine giant is estimated to enjoy close to 31% of the ad market in the world, which is a phenomenal thing, and the fact is that it continued to get to more than its share. The digital ad market research firm, eMarketer believes that the digital ad spend would exceed TV. The research firm is confident that digital ad would be the first choice next year. The current year projection for global ad market is about $579 billion by eMarketer though there are others, who have different estimations.
Alphabet Inc (NASDAQ:GOOGL) has not disclosed revenue details of its YouTube. That makes analysts and research firm to make their own guess or estimations. In the same way, eMarketer said that YouTube recorded $3.04 billion ad revenue in 2014, which jumped to $4.28 billion in 2015 recording 40.8% gain. The research firm said that YouTube’s ad revenue will grow 21% in the current year to reach $5.18 billion. These figures were after paying the TAC. The growth rate projected by eMarketer appears to be somewhat pessimistic. The absence of authentic figures from the company left the investors to believe the numbers provided by others.
On a valuation part, Alphabet Inc (NASDAQ:GOOGL) is still trading cheap. For instance, its PE for the trailing twelve-month period is 30.8 whereas the industry enjoys 57.6 times. Similarly, its price to book is cheaper at 4.1 times than the industry average’s 4.6 times. As far as the price to sales also, it looked cheaper at 6.5 compared to the 7.3. Its revenue growth rate is fully compensated by stronger than industry average operating and net margin. The return on assets and equity were more than double the industry averages. Therefore, the stock looks solid on valuation part.
There is nothing to worry about TAC or Alphabet Inc (NASDAQ:GOOGL) shares. As far as the big firms are concerned, there would be concerns, which would be of short-term. However, they might not have a long-term impact. The company is fully aware of its current position and has enough plans to take care of its future also. This is a stock that one must hold in any portfolio. Any dip can be a buying opportunity only.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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