As tech stocks continue to soar higher in 2023, analysts at Bernstein are recommending that investors “move to the sidelines” on Google-parent Alphabet. While it’s a tough call to bet against this historically winning company, analysts have identified some mounting pressures that may cause investors to pause.
Firstly, the core business of internet search may be “hollowing out”. This could be due to increasing competition, not just from artificial intelligence trends, but also from retail media competition and a share-shift back to Meta Platforms (META), owner of Facebook and Instagram. Bernstein remains optimistic on a recovery in digital advertising spending, but with these pressures building, shares in Alphabet (ticker: GOOGL) may presently be fairly valued.
The team at Bernstein downgraded Alphabet stock to “Market Perform” from “Outperform” and held the price target at $125. While there may be tailwinds ahead, investors may want to consider taking a step back on this tech giant. Don’t miss out on a potentially higher return, but keep a watchful eye.
Google’s Stock Appears Fairly Valued, Time to Move to the Sidelines
According to the team at Bernstein, YouTube is facing stiff competition from TikTok, resulting in a “shrinking slice in a slow-growing pie.” Furthermore, Google’s push to compete seriously in AI would require more hiring and may lead to pressure on earnings. In light of these developments, “every so often Google’s stock appears fairly valued just as it does today, with a balanced risk/reward and narrative that has quickly caught up to fundamentals,” said Shmulik of Bernstein. Hence, it is recommended to “move to the sidelines.”
Despite this downgrade, there are still a number of bullish arguments for Google. The company continues to receive an average Buy rating from more than 40 analysts surveyed by FactSet, with not a single Sell rating. “It’s hard to bet against search, and there may be enough slack in the cost base to limit margin pressure from AI spend,” said Shmulik. There is also a case for re-rating tied to Google Cloud growth driving Google into the “clear AI winner” category.
UBS recently downgraded Alphabet to Neutral from Buy, citing risks that could disrupt its advertising business as the company powers search results with AI.
Overall, while the future may look uncertain for Google right now, there are still reasons to be optimistic for its future prospects.
