5 Reasons Why Stifel Downgraded Alphabet

Alphabet Inc GOOG GOOGL reported its fourth quarter results, which included an earnings miss and prompted multiple Wall Street analysts to downgrade the stock.

The Analyst

Stifel's Scott Devitt downgraded Alphabet's stock from Buy to Hold with an unchanged $1,150 price target.

The Thesis

Alphabet's fourth quarter showed that the company continues to achieve growth at scale in its core business, including search, YouTube and advertising, Devitt said in a note. The stock has now reached the analyst's $1,150 price target and after Thursday's report a move to the sidelines may be justified not just due to valuation:

1. Amazon.com, Inc. AMZN, not Google's search engine, has become the first web destination for product searches.

2. Google's Cloud Platform (GCP)'s market share in the global cloud business remains in the high-single digits versus Amazon's AWS at 35 percent-plus. For the time being, Amazon AWS is in a "league of its own" while Google has "a long way to go."

3. Regulatory concerns in Europe prompted the company to allow competing comparison shopping services on its platform. While the company can easily "swallow" multi-billion dollar fines the biggest risk lies in what action the company might be forced to take to change its business model.

4. Google's TAC (total acquisition costs) as a percentage of total gross revenue continues to move higher. Rising TAC presents a "greater risk" to the stock's multiple compression rather than margin erosion in the near-term.

5. Alphabet's 2018 margins are on track to repeat 2017's flat performance but are expected to move higher in 2019 and beyond.

Price Action

Shares of Alphabet were trading lower by 5 percent Friday.

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