YouTube's Ad Boycott Was Big News, But Don't Expect It To Impact Alphabet's Q1 Results

For the most part YouTube's ad controversy has played out and the worst may be behind Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL). Nevertheless, sentiment heading into the company's earnings report on April 27 is "softened," at least according to MKM Partners' Rob Sanderson.

In a research report on Friday, Sanderson expects the impact of the YouTube ad controversy to be a primary focus for investors during Alphabet's earnings report but the analyst believes any impact will be "negligible" in the first quarter and merely a "modest drag" to the second quarter.

Specifically, the analyst is expecting a full-quarter impact from the controversy to be a $50 million drag in the first quarter, which represents just 0.2 percent of his ad revenue forecast.

"The boycott seems to be well contained by this point and Alphabet is addressing issues," Sanderson wrote.

What Else To Look Out For

Sanderson argued that Alphabet's position "remains incredibly strong" and there is naturally more to look out for in Alphabet's earnings report.

• Websites revenue growth is modeled to be 18.6 percent which marks a deceleration from 20.3 percent last quarter.
• Operating margin could come in lower by 75 basis points year-over-year on a non-GAAP basis.
• For the first time there will be no non-GAAP reconciliation tables after the company shifted to a GAAP reporting format and may represent a "source of confusion."
• The rate of traffic acquisition costs escalation could show signs of moderating in the first quarter. If this doesn't happen investors could have reason to become incrementally concerned about greater than modeled deleveraging as a shift to mobile continues.

Bottom line, Sanderson argued, Alphabet's story remains "incredibly strong," especially its high growth profile given its already large size. As such, the stock's valuation is "highly attractive" as the company will continue gaining share versus media companies.

Shares remain Buy rated with an unchanged $1,000 price target.

Related Links:

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