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PhillipCapital upgrades Alphabet to 'buy' after 'standout' 4QFY2021

Felicia Tan
Felicia Tan2/8/2022 06:22 PM GMT+08  • 3 min read
PhillipCapital upgrades Alphabet to 'buy' after 'standout' 4QFY2021
PhillipCapital has also upped its TP to US$3,493 ($4,697.04).
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PhillipCapital analyst Jonathan Woo has upgraded his recommendation on Alphabet to “buy” as its results for the 4QFY2021 ended December stood in line with his expectations.

The analyst has also upped his target price to US$3,493 ($4,697.04), with a weighted average cost of capital (WACC) of 6.6% and a lower terminal growth rate of 3.5%.

During the 4QFY2021, Alphabet’s revenue increased 32.4% y-o-y to US$75.3 billion. 4QFY2021 PATMI grew 35.6% y-o-y to US$20.6 million.

For the FY2021, Alphabet’s revenue of US257.6 billion and PATMI surpassed Woo’s estimates at 102% and 103% of his FY2021 forecasts respectively.

In his report dated Feb 4, Woo called Alphabet’s performance for the 4QFY2021 a “standout quarter” in terms of revenue growth.

The quarter’s revenue growth was heavily supported by both its Services and Cloud segments, which grew 31% and 45% y-o-y respectively, notes Woo.

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Advertising revenue for the tech giant also continues to be an important revenue driver for Alphabet, with a 33% y-o-y growth to US$61.2 billion. The segment made up some 81% of its total revenue for the quarter.

“Much of the advertising revenue growth was supported by increasing advertiser spend, coupled with an uptick in consumer online activity over the holiday season as consumers spent more time and money shopping online in the quarter. Advertising spend mainly came from the retail segment, with finance, entertainment, and travel also strong contributors,” writes Woo.

Alphabet’s Cloud segment remains Alphabet’s fastest growing segment. Its order backlog of US$51 billion should provide the company with a “stable source” of Cloud revenue moving forward, says the analyst.

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“We expect Cloud revenue to continue growing as the company continues to invest heavily in increasing server capacity to accommodate demand, as well as continued tailwinds from global digitalization trends, and the increased emphasis on cybersecurity,” he adds.

20-for-1 stock split

Alphabet’s potential stock split could make the counter “more attractive and accessible” to retail traders and investors with a reduced stock price of around US$150 from around US$3,000, says Woo.

The company had, on Feb 1, announced that its board of directors had approved a 20-for-1 stock split in the form of a one-time special stock dividend on each share of its Class A, B and C stock.

The split is subject to shareholders’ approval. Upon its approval, the split will take place at the beginning of the 3QFY2022.

‘Solid’ year for FY2022

The way Woo sees it, FY2022 is shaping up to be a “solid” year for Alphabet as it continues to “ride tailwinds from global digitalization and shifting consumer preferences in all of its operating segments”.

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He has also adjusted some of his growth estimates for the FY2022 largely due to “tougher comparables” compared to that of the FY2021.

For the FY2022, Woo has increased Alphabet’s estimated revenue by 3%, and PATMI by almost 1% albeit with a slight reduction in net margins.

“We forecast revenue growth for FY2022 to be around 18% y-o-y, which is more in line with pre-pandemic growth rates, and slightly below its five-year compound annual growth rate (CAGR) of 23%. PATMI is expected to grow 17% y-o-y – roughly in line with revenue growth, as we do not foresee any growth in net margins for FY2022,” says Woo.

Shares in Alphabet closed US$81.84 lower or 2.86% down at US$2,784.02 on Feb 7, or an FY2022 P/B of 7.5 times.

Photo: Bloomberg

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