Why Google's Speedy Recovery In Digital Advertising Impresses Stifel Analyst

Google parent company Alphabet Inc GOOG GOOGL showed an impressive and speedy recovery in its digital advertising business after bottoming in 2020, according to Stifel.

The Alphabet Analyst: Scott Devitt upgraded Alphabet's stock rating from Hold to Buy with a price target lifted from $2,025 to $2,350.

The Alphabet Thesis: The COVID-19 pandemic negatively impacted Alphabet's digital advertising business, but metrics showed a swift and sharp rebound by the end of 2020, Devitt wrote in the upgrade note. Specifically, Google Properties (mostly search engine and YouTube ads) in the fourth quarter showed a 21.6% year-over-year growth rate, marking the fastest pace of growth since mid-2018.

The momentum can be attributed to companies of all shapes and sizes embracing a digitalization trend and this should continue even in a post-COVID reality, the analyst wrote. Advertisers will prioritize digital spending as it has proven to offer superior return on investment opportunities versus linear TV.

Related Link: How Google's Decision To Scrap Third-Party Cookies Will Affect The Search Giant

Continued success in the digital business is the driving factor of a new bullish stance, but there are other catalysts to help lift the stock. These include margin improvement from recent operating leverage, growth potential from under-monetized business units and strong expectations for the Cloud business.

Finally, Alphabet's stock is trading at a NTM P/E of around 28 times and this is just one standard deviation above its average around 25 times.

"Over a multi-year period, we believe GOOGL shares support a high-single-digit to low-double-digit annualized return from here," Devitt wrote.

GOOG Price Action: Class C shares are up 0.16% at $2,059.34 Tuesday morning.
GOOGL Price Action: Class A shares are up 0.30% at $2,051.98 Tuesday morning.

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