Alphabet Sees Strong Growth, But Not Everyone On The Street Is Rushing To Buy

Alphabet IncGOOGGOOGLPeter Stabler

Alphabet's earnings report was powered by a strong performance across all of its units and highlighted by a 20 percent gain in the top line, Stabler said in a research report. Meanwhile, the company's ongoing improvements to its advertising business represent "durable growth engines" and fully addresses the needs of marketers. Meanwhile, paid click growth showed an "impressive" 61 percent gain on a year-over-year basis and a 15 percent sequential growth within the Google operated properties, Stabler continued. In addition, YouTube saw notable strength despite an ad controversy which appears to have posed no impact on the results.

Canaccord: Solid Quarter But Don't Don't Buy

Finally, Alphabet may have a gross margin problem in which fast-growing segments boasts lower gross margin structures. For example, the mobile search's gross margin is modeled to be at 60 percent, YouTube is modeled at less than 40 percent and programmatic at less than 20 percent. These figures fall short of the company average of 62 percent over the past three years and 60 percent in the second quarter. Related Links: Alphabet's Solid Q2 Aided By 'Substantial' Growth In Mobile Google Chrome World's Top Browser; It's Also The Most Vulnerable To Hackers

"We believe additional user signals provided by mobile device adoption, expanded targeting options and improvements in measurement are key drivers for increasing search and YouTube ad productivity," the analyst added.

On the other hand, Alphabet did report a higher-than-expected traffic acquisition cost, but this shouldn't be of concern to investors. At the end of the day, Google maintains its status as being well-positioned to continue gaining market share in the online advertising space, and the adoption of machine learning technologies will result in efficiency improvements for marketers.

Finally, Alphabet still has many levers for future growth, including YouTube, local, Cloud and hardware sales.

Canaccord Genuity's Michael Graham maintains a Hold rating on Alphabet's stock with an unchanged $1,000 price target despite the company's "solid" earnings report in which core revenue growth of 19.6 percent was "fairly close" enough to the "psychologically important 20 percent level."

Looking forward, Alphabet's third quarter will mark an "important test" as this represents the anniversary in which mobile ad slots started rolling out in 2015 and 2016.

"We believe these trends are likely to persist for the foreseeable future, and while we applaud the increased gross profit dollars they bring, we note that this headwind makes raising EPS estimates more difficult," the analyst concluded.