Why Google's Stock Offers 50% Upside Potential

Alphabet Inc GOOGL GOOG shares are worth more than the current Street-high price target of $3,000, according to an analyst at Bernstein.

The Alphabet Analyst: Bernstein analyst Mark Shmulik maintained an Outperform rating and $2,500 price target for Alphabet shares.

The Alphabet Thesis: The sum-of-the-parts analysis of Google shares yields a valuation of $3,100 per share, analyst Shmulik said in a note. The analyst's STOP analysis splintered Google into six businesses, namely Search, YouTube, Network, Cloud, Hardware and Other, and Other Bets.

Google is unlikely to make major moves, given the streamlining seen over the past 12 months, including winding down of Loon, Sidewalk Labs, etc., the analyst said. The Network business, however, is likely to be a divestment candidate, according to the analyst.

The Network business' revenue contribution has slid from 20% in 2015 to 13% in 2020, while at the same time attracting regulatory interest, given Google's dominant position across the DSP, SSP and the exchange, Shmulik said.

Related Link: 3 Reasons Alphabet Stock Is Underperforming, Yet Resilient

"We like the Google story, with strong 2021 catalysts across search (tied to re-open), YouTube (TV ad dollar migration) and Cloud (secular tailwinds)," the analyst wrote in the note.

There have been calls to break up big tech, and Google is facing three U.S. antitrust lawsuits currently regarding its dominant position in Search, contract negotiations with OEMs and anticompetitive behavior in Network Members, the analyst noted. The company is also facing pressure from European regulators, he added.

"Internet investors are grappling with regulatory and privacy headwinds against an otherwise stellar business with a compelling TAM," Shmulik said.

A break-up, the analyst said, could more likely be accretive. A regulator-forced divestment will not occur anytime soon, he added.

Bernstein has a bull-case price target of $3,100, representing about 50% upside from current levels, while the unlikely bear case offers a floor of $1,675, the analyst said.

Search contributes $1,651 to the firm's bull-case price target, while Network Members, YouTube ads and subscriptions, Google Cloud, Hardware and Other, and Other Bets would account for $76, $496, $572, $173 and $113, respectively.

Alphabet Price Action: At last check, Alphabet Class A (GOOGL) shares were advancing 3.71% to $2,208.75.62. Class C shares (GOOG) are up 3.76% at $2,218.20.

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

(Photo: Pawel Czerwinski via Unsplash)