Alphabet (GOOG/GOOGL) outperformed 3Q18 earnings estimates despite slightly missing on revenues for the first time since 1Q16. The sales shortfall was largely driven by foreign exchange losses in Brazil and Argentina due to the stronger US dollar. Revenues still grew 21%, or 22% after adjusting for the currency impact.

Operating expenses were up 26%, pacing ahead of sales growth. Traffic Acquisition Cost (TAC) growth finally appears to be slowing down, which will help improve overall profitability for GOOG. In fact, EBITDA margins for the trailing twelve months are expected to rise from 32% to 37% over the coming quarters as the company anniversaries investments in TAC partnerships. Net income margin is expected to hover around 20% for the foreseeable future.

Segment results were encouraging, with particular strength from mobile search, YouTube, cloud, and desktop search. Alphabet continues to make disciplined investments for ongoing growth in areas such as cloud computing, machine learning, artificial intelligence, Waymo’s self-driving car fleet rollout, and Verily’s healthcare research.

GOOG shares have traded lower since reporting earnings in a tricky market environment for growth stocks, but Northlake continues to like the outlook for the stock. The rare combination of Alphabet’s consistent high sales and earnings growth, market share dominance, scale, ongoing innovation with untapped opportunities, and relatively attractive valuation is hard to come by. Offering consistent 15-20% growth, GOOG currently trades at roughly 14.5x 2018 EV/EBITDA and 12x 2019 EV/EBITDA. Rolling those multiples forward implies upside to roughly $1,300 in 2019 and $1,500 in 2020.

GOOG/GOOGL is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  GOOG/GOOGL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.