Alphabet's [GOOGL] share price might be up over 20.93% this year to date, but that doesn't mean everyone's backing Google's parent company.
Hedge fund managers have started to withdraw their support for Alphabet’s share price. Disappointing quarterly results could be one reason and, in an environment where other FAANG stocks are recording bumper earnings, hedge fund managers could be thinking there are better opportunities elsewhere.
So, is this a signal for investors to follow suit? If so, what are the headwinds likely to cause a drop in Alphabet's share price?
How are hedge funds reacting to Alphabet’s share price?
According to Insider Monkey, 157 hedge funds held long positions in Alphabet at the end of Q2, representing a 6% decline from the previous quarter. Viking Global dropped the most shares in Alphabet, cutting $363.9m in stock. In second place is Tybourne Capital Management, shifting $86.2m worth of stock.
Despite the selloffs, however, Alphabet managed to climb one spot in Insider Monkey’s list of 30 most desirable stocks among hedge funds.
What's behind the selloff?
So, what has been causing hedge funds to baulk at Alphabet’s share price? The first place to look is Alphabet's second-quarter earnings. In the results, revenue came in at $38.3bn, a 2% decline on the previous quarter. Earnings per share also dropped, coming in at $10.13 as opposed to the $14.21 seen in the same quarter last year.
The cause of these declines was a drop in advertising revenue as companies slashed marketing budgets. According to company filings, ad revenue growth dropped 8.4% in the quarter. And while “other” revenue from initiatives like its Pixel Smartphones grew from $4.08bn to $5.12bn, Alphabet is largely dependent on ad revenue.
Alphabet's Q2 revenue - a 2% decline from previous quarter
However, Ruth Porat, CFO of Alphabet and Google, noted that there had been a gradual improvement in ad revenue towards the end of the quarter. Besides, since Google is the world’s de-facto advertising platform, it may well see revenues increase with the shift to e-commerce brought about by the coronavirus in upcoming quarters.
Who's backing Alphabet’s share price?
One person bucking the trend is famed contrarian investor and subject of The Big Short, Michael Burry. Burry’s firm, Scion Asset Management, bought 80,000 call options in Alphabet, worth circa $113m. Given that Scion's total fund is worth approximately $315m as of 30 June, this Alphabet position represents a massive 35.9% of the portfolio.
Burry is not alone in backing Alphabet’s share price, however. Last month, UBS upped its price target on Alphabet from $1,600 to $1,970, which, if hit, would see a 19% upside on Alphabet’s share price through 1 September’s close. In their analysis, UBS cited a recovery in ad revenues and an increase in offline retailers using e-commerce post-lockdown as reasons to expect further upside from Alphabet’s share price.
“GOOG's ad business has increasingly levered to sustained eCommerce trends (especially as offline retailers/brands pivot to omnichannel shopping) and to a recovery trade as "shelter-in-place" abates in the coming 6-12 months” - UBS analyst Eric Sheridan
"GOOG's ad business has increasingly levered to sustained eCommerce trends (especially as offline retailers/brands pivot to omnichannel shopping) and to a recovery trade as "shelter-in-place" abates in the coming 6-12 months," wrote UBS analyst Eric Sheridan.
Given this, investors will need to consider whether the hedge funds or Burry and UBS are right on Alphabet. Alphabet's share price has an average $1,699.84 price target from the analysts tracking the stock on Yahoo Finance. Hitting this would see a 2.7% upside on its current share price as of 1 September’s close.