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Why is Alphabet’s share price performance underwhelming?

Alphabet’s [GOOGL] share price has grown tremendously since it debuted on the stock market in 2004. However, since the start of this year, it has underperformed compared to other FAANG class members.

Year to date, Alphabet’s share price is up just 8.34% (through 5 October), while Apple’s [AAPL] share price has jumped 55.15% and Facebook’s [FB] share price has risen 26.16%.

That said, Alphabet’s share price is 43.6% above its 52-week low of $1,013.54, which it dropped to on 23 March. Despite hitting an all-time high of $1,733.18 on 2 September, though, the tech stock rout has seen Alphabet’s share price drop back circa 16% since then. 

So, what is hampering its performance, and can Alphabet’s share price start to impress investors soon?

 

 

 

Volatile stocks

Aside from the uncertainty and volatility currently surrounding tech stocks, some investors may be spooked by news that the US Department of Justice’s plans to bring an antitrust case against the company are picking up pace. Alphabet has been accused of prioritising its own services and products when users perform a Google search.

According to a New York Times report on 3 September, officials had told lawyers to wrap up their preparation work by the end of the month.

This, combined with the tech stock sell-off, is likely to have contributed to Alphabet’s share price closing down just short of 3% on 4 September.

Another factor that will have contributed to Alphabet’s share price stalling is the impact the coronavirus pandemic has had on advertising internationally. Despite much of the global population being encouraged by governments to spend more time in the home and, as a result, spending more time online, job and income uncertainty has meant that fewer people, at least in the US, were using Google to search for purchases than before the pandemic started.

Alphabet’s total revenue for Q2 2020 was $38.2bn, a 2% year-over-year decline but slightly higher than the $37.46bn analysts had expected. The company earns the bulk of its revenue via Google Ads and Search Advertising, which was down 10% from the year-ago quarter at $21.3bn. 

$38.2billion

Alphabet's total Q2 2020 revenue - a 2% YoY drop

  

The silver lining for Alphabet was that its cloud segment enjoyed a 42% year-over-year boost thanks to the rise in home and remote working, which brought with it an increased demand for cloud services and software. However, the $3.01bn it brought in for its cloud revenue accounts for just 8% of its total revenue, and the company has a smaller cloud market share than both Amazon [AMZN] and Microsoft [MSFT]

Despite Q2 2020 representing the first-ever year-over-year decline in total revenue since going public, Alphabet is cautiously optimistic that things will improve in the quarters ahead. 

 

What the analysts think

Meanwhile, Morgan Stanley analyst Brian Nowak sees reasons to be cheerful with the holiday season just around the corner. He has reiterated an Overweight rating for the stock and raised his price target slightly from $1,760 to $1,800, which would see a 21.4% increase on Alphabet’s share price as of 5 October’s close. 

Nowak acknowledges that the pandemic may have seen people more reluctant to spend money on big purchases, but they will still buy presents in the run up to Thanksgiving and Christmas. More purchases mean more people using Google to search for products and to compare prices. 

“Even when consumers know the exact products they want to purchase, nearly one out of five will visit Google first,” Nowak wrote in a note seen by Barron’s.

“Even when consumers know the exact products they want to purchase, nearly one out of five will visit Google first” - Morgan Stanley analyst Brian Nowak

 

He said that half of Amazon Prime members will turn to the search engine when researching products. Amazon Prime Day 2020 has been delayed due to the pandemic and is now set to take place on 13-14 October, and it should result in a significant increase in Google’s web traffic. Overall, e-commerce accounts for between 25% and 30% of Alphabet’s search revenue, he added.

Bank of America Securities analyst Justin Post also considers the stock a Buy and has set a target of $1,850 on Alphabet’s share price, according to Benzinga.

While the prospect of an antitrust lawsuit looms large, Post says that any negative impact on the share price will be material and in reaction to any news on the case. Litigation could take between two and three years to complete, by which time the case may have been settled financially.

It would appear that Wall Street is in agreement that any lawsuit is unlikely to impact Alphabet’s share price too much. MarketBeat data shows there are currently 44 ratings for the stock, of which 41 are Buy and three a Hold. The consensus 12-month median price target is $1,672.86. 

 

Market Cap$1.01trn
PE ratio (TTM)32.60
EPS (TTM)45.49
Quarterly Revenue Growth (YoY)-1.7%

Alphabet share price vitals, Yahoo Finance, 6 October 2020

Disclaimer Past performance is not a reliable indicator of future results.

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