Margins at Alphabet ‘s Google unit are poised to contract for a while, but investors shouldn’t give up hope in the company’s overall growth story, Aegis Capital internet analyst Victor Anthony told CNBC on Friday.
“I think investors will have to come to terms with the fact that the Google segment margins will contract for several more quarters because they are pursuing growth areas,” Anthony told ” Squawk Box. ”
“The reasons why the margins are contracting is because of the mobile shift,” he continued. “It’s [also] because of the hardware sales, which are a lower margin. ”
Alphabet’s quarterly earnings missed Wall Street estimates on Thursday. The company cited lower costs-per-click on its properties and a raised tax on stock-based compensation as reasons for the miss.
But Alphabet revenue did top expectations.
Anthony remained bullish on Alphabet, particularly in its revenue-driving segments like mobile and YouTube. “YouTube is growing like weeds for them and they’re investing against that,” he said.
At some point, Anthony said, the company will gain leverage and expand its margins, reversing the slump. Alphabet is working on paring back some of its earlier losses, which Anthony said will position the company for margin expansion.
“This is a business that has benefited from multiple different secular tailwinds,” he said. “There’s search, there’s video, it’s programmatic. Now you have hardware, artificial intelligence, machine learning. You have cheap multiple stock, very well capitalized balance sheet, $86 billion in cash. ”
“These are the reasons why you want to buy,” Anthony said. “So I think investors will have to overlook the market compression for now and look at the positives overall. “
