Alphabet (GOOG/GOOGL) reported 1Q20 earnings that indicated better than expected results in January and February before the economic shutdown, offset by a sharp but not quite as bad as expected slowdown in March.  The company commented that advertising trends at Search and YouTube have stabilized in April with signs of green shoots.  Emerging businesses like Cloud and the Google Play Store each stayed on track at high levels of growth.  Management noted that it plans no change in its recently elevated level of stock buybacks.  Finally, management has been quick to announce cost and capital spending controls since the crisis began.  This continues a pattern of tighter corporate management and greater transparency since Sundar Pichai was elevated to CEO.  Alphabet has long been criticized for its loose management style.  Improvement on this front, even if spurred partially by a crisis, is a positive for the valuation of GOOG/GOOGL shares.

The earnings and conference call could be classified as “not as bad as expected.”  With optimism about health care solutions for the coronavirus and reopening of the economy picking up, investors bid GOOG/GOOGL shares up 9%.  The shares are now unchanged since December 31^st.

Usually, our quarterly recaps focus a lot on the reported results but Alphabet’s report and conference call are likely to be the pattern as the rest of Northlake’s individual stock holdings report in the next two weeks. Investors will largely ignore 1Q20 and focus instead on how April developed relative to the initial shutdown impact in the second half of March.

In the case of Alphabet, the Google search business went from up 18-20% to down 15-18% and YouTube went from up 20% to up “high single digits.”  These two businesses are the key drivers of Alphabet revenue and earnings.  In both cases, investors were expecting much larger declines in growth. Management noted that the outlook in 2Q20 and beyond is extremely uncertain but they had recently seen a small pickup in activity on the part of large advertisers.  Things to watch going forward are resiliency the company has seen in direct response and ecommerce advertising and the unusually large exposure to travel, tourism, and consumer services advertisers.

Northlake’s view of GOOG/GOOGL shares on a long-term basis is mostly unchanged despite the coronavirus crisis.  It is more difficult to calculate a target price now as the variability in estimates for earnings and cash flows in 2020 and 2021 is very high.  We do believe that the company’s competitive position and opportunity set will be larger exiting the crisis whenever that may be.  The importance of the company’s businesses to users has never been clearer.  The coronavirus crisis is likely accelerating trends toward online services and ecommerce on a secular basis.

Previous to the crisis, we thought GOOG/GOOGL shares could reach $1,525 in 2020 and $1,700 looking into 2021.  We still believe these targets are achievable but the time horizon and path to reach them are more uncertain.  We are willing to take the uncertainty with the upside especially now that Alphabet has potentially enhanced its long-term opportunity.

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.