Roth Capital Partners analyst Rohit Kulkarni issued a report on Friday on Google parent company Alphabet (Alphabet Inc Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL) where he maintained a “Buy” rating and $126.00 target price, which at the time of publication represented a projected one-year return of 38.6 per cent.
Google recently released its annual 10-K filing, which gave investors a closer look at some of the dynamics around the company, including Traffic Acquisition costs (TAC) and monetization metrics such as Cost-per-Click (CPC) and Cost-per-Impression (CPM).
Kulkarni said the data shows that Google’s TAC as a percentage of revenue has steadily declined over the past ten years as Mobile Advertising has increased, highlighting rising payments to Apple for distribution. TAC fell from 22 per cent of revenue in 2013 to 17 per cent in 2022. Payments to distributor TAC increased from five per cent of revenues in 2013 to nine per cent in 2018.
“Google paid ~$49 billion in TAC in 2022, and we estimate Distributor TAC ranged between 10.0 per cent and 11.0 per cent of Revs in 2022 (or 57 per cent to 63 per cent of TAC), implying $28-31 billion in annual payments to distributors. We believe Google’s payments to Apple last year accounted for the vast majority of this amount, likely exceeding $20 billion,” Kulkarni wrote.
At the same time, Paid Clicks grew between 2014 and 2018, while CPC declined over the same period. But Paid Clicks recovered in 2021 and 2022 with a slight decrease in CPC in 2022, which Kulkarni took as a sign that Google’s advertising business is still in balanced health.
As for Impressions and CPM, Kulkarni noted that the relationship between the two has been variable over the years.
“One thing of note is during the COVID period (2020-2021) CPMs increased 35 per cent year-over-year while impressions only grew two per cent in the same period. This push forward in CPMs is likely due to the digital advertising environment holding onto market share gains experienced during the lockdowns, as in 2022 CPMs grew one per cent year-over-year while impressions trajectory advanced three per cent,” he said.
By region, Kulkarni said there’s been uniform deceleration across the board with no specific pockets of strength or weakness, based on the company’s overall reported revenue growth rate of 14 per cent year-over-year in 2022.
Looking ahead, the analyst is projecting full 2023 revenue at $300.908 billion and EPS at $5.54 per share.