The Ratings Game: Google’s ad sales slump but recovery is on the way, analysts say

Despite the unprecedented fall-off in its core business, however, Google executives said conditions had improved as the quarter progressed, and offered cautious optimism for a return to growth in the current period.

Read more: Alphabet Q2 results show ad spending is still in a rut

Google reported fiscal second-quarter net income of $6.96 billion, or $10.13 a share, compared with net income of $9.95 billion, or $14.21 a share, in the year-ago quarter. Revenue after removing traffic-acquisition costs (TAC) declined to $31.6 billion from $31.7 billion in the year-ago period. Analysts surveyed by FactSet had estimated $7.95 a share on ex-TAC revenue of $30.66 billion on average.

“Stepping back, Google is feeling some impact from Covid-19, but not nearly as bad as other segments of the advertising economy, and should be back to solid ad growth in 2H,” Ross Sandler of Barclays said in maintaining an overweight rating and boosting its price target to $1,800 from $1,600.

While the quarter was characterized by Pivotal Research Group analyst Michael Levine as slightly “underwhelming,” search projections from Alphabet Chief Financial Officer Ruth Porat during a conference call with analysts were “quite bullish.” Levine is sticking with a buy rating and raising his price target to $1,725 from $1,575.

A recovery in the current [third] quarter is “encouraging,” Mizuho Securities analyst James Lee said in a note Friday that highlighted search revenue. The backbone of Google sales resumed growth in July from -10% in the second quarter and -15% in March.

“Although COVID-19 clearly has a negative impact on advertising demand, we believe that digital advertising will likely gain share against traditional media post the pandemic cycle,” wrote Lee, who maintains a buy rating on Google shares and price target of $1,750.

Morgan Stanley’s Brian Nowak, who retained an overweight rating and price target of $1,760, was heartened by gradual improvements in ad trends across Search/YouTube/Network during the quarter. “As user search activity returned and ad dollars followed, [it was] consistent with the surging e-commerce and direct response ad spending” at Facebook Inc. FB, +7.43% , Snap, and Twitter Inc. TWTR, -1.57% , he said.

“YouTube disappointed delivering 7% Y/Y vs. a reasonable 15% bogey,” AB Bernstein analyst Mark Shmulik added in a note Friday that maintained an outperform rating on Google shares, with a price target bumped up $50 to $1,800. “While the platform skews towards brand-based ad spend, which has suffered, SNAP SNAP, +2.89% faced a similar brand skew and was able to pivot and grow 17% Y/Y.”

Diversification in Google’s revenue model — especially in the performance of Google Cloud, which soared 43% to $3 billion, year-over-year — was cited by several analysts are a continuing positive sign amid overall declines in ad spending across all media platforms.

“GCP (cloud platform) growth remained stable even as competitors decelerated a bit, reflecting Google’s more aggressive go-to-market strategy for infrastructure, data analysts and machine learning services,” Baird Equity Research analyst Colin Sebastian said in a note Friday that reiterated an outperform rating while raising his price target to $1,675 from $1,650.

Despite an elongated recovery curve, RBC Capital Markets analyst Mark Mahaney continues to view Google, along with Amazon.com Inc. AMZN, +3.51% and Facebook as “among the most resilient ’Net Advertisers. Fundamentals are slowly but surely improving, and aggressive share repo continues. We model 8% Gross Revenue growth in Q3 with growth rate close to normalized by Q4 at 15%,” wrote Mahaney, who on Friday maintained an outperform rating and lifted his price target to $1,700 from $1,500.