Alphabet (GOOG/GOOGL) reported strong 2Q19 results, with constant-currency revenue growth of 22% coming on the heels of a disappointing 1Q19 report. The reacceleration of revenue growth back above the crucial 20% bogey will help put to rest concerns that a secular slowdown at GOOGL has begun. Along with strong sales, GOOGL also reported better-than-expected profit margins leading to a nice upside surprise on earnings. Shares of GOOGL traded up almost 12% on the good news, bringing the previous all-time high reached the day before the 1Q19 earnings disappointment back within reach. The typically tight-lipped management team also provided more detail than usual, particularly around the fast-growing cloud business.

In 1Q19, revenue growth unexpectedly decelerated below 20% . The stock was hit hard, as investors have long focused on the surprising ability of the company to consistently maintain greater than 20% revenue growth despite the massive scale and high market share of the primary digital advertising business. GOOGL noted on the 1Q19 call that the timing of product changes were the cause of the slowdown and declined to provide further detail. On the 2Q19 earnings call, management did not elaborate much more about the previous slowdown, but did note that new products always go through extensive and time-consuming testing before being rolled out to customers. Management sounds as confident as ever that there are plentiful opportunities allowing the company to sustain elevated growth. Although Wall Street panic hit the stock hard after 1Q19, it appears investors are again willing to give GOOGL the benefit of the doubt that product innovation in Search and fast-growing businesses like Cloud and YouTube can sustain historical growth rates.

Looking toward the back half of 2019 and ahead to 2020, Northlake expects GOOGL move toward $1,350-$1,400 based upon reasonable valuations o25x 2020E EPS or 12x 2020E EBITDA. Further upside support should be unlocked over the medium-to-long term as the various “other bets” begin to contribute meaningful profits. Waymo is a good example of this potential, as the Alphabet-owned company’s self-driving cars are already conducting live tests with paying customers. Northlake views  other bets as providing good upside optionality, while still paying a fair price for the strong growth of the core Google businesses.

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.