Alphabet Remains Core Tech Bet But Regulatory Risks and AI Uncertainties Loom: Analysts

Analysts re-rated Google parent Alphabet Inc GOOGL Thursday.

• Cantor Fitzgerald analyst Deepak Mathivanan initiated coverage on Alphabet with a Neutral rating and a price target of $190.
• Wedbush analyst Scott Devitt reiterated Alphabet with an Outperform rating and a $205 price target.

Cantor Fitzgerald: Mathivanan noted that Google should remain at the core of a growth-oriented technology, media, and telecom (TMT) portfolio. However, the analyst noted limited upside to both Street estimates and valuation multiples in the next 12-18 months.

Google’s core Search revenue growth has accelerated over the last five quarters to exceed +15% in constant currency in the second quarter. As per the analyst, while growth should decelerate from here, Search should steadily benefit from query volume growth and monetization gains over the next few years.

He said that share loss to competition, directly and indirectly, appears minimal so far. Early feedback on generative AI User experience (UX) appears positive and enables Google to mitigate use-case erosion.

According to fundamentals, the core search business has several levers to grow, plus double digits in fiscals 2024 and 2025, Mathivanan writes.

However, recent regulatory setbacks bring plenty of medium-long-term uncertainties while search UX transforms with expensive AI deployments.

Additionally, fiscal 2023 EPS growth will likely face headwinds from accelerating infrastructure costs and headcount additions.

Google stock is currently trading at 19x fiscal 2025 EPS, a discount to mega-cap peers, which he noted as unlikely to change while near-term regulatory and AI-related uncertainties linger. Mathivanan projects third-quarter revenue of $85.5 billion and EPS of $1.86.

Wedbush: On September 9, the second antitrust trial against Google in 2024 will commence in the U.S. District Court, Devitt noted.

The U.S. DOJ complaint primarily focuses on Google’s ad tech stack, specifically Google Ad Manager. Devitt flagged the DOJ’s complaint proposing the divestiture of the Google Ad Manager Suite but does not identify other areas of the ad tech stack as specific targets for divestiture.

The analyst noted that Google Ad Manager represented only 4.1% of revenue and 1.5% of the operating profit of the consolidated Alphabet business in 2020.

While the analyst acknowledged near-term headline risk associated with the pending trial, he noted the overall risk to the industry is limited based on the company’s recent financial disclosures related to its ad tech products.

Price Action: GOOGL stock is up 0.20% at $156.77 at the last check on Thursday.

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