Tech stocks, which led U.S. stock markets higher in the first half of the year, have struggled as a group in the second half, and most Big Tech companies are languishing below their 2024 highs, even as the broad-based S&P 500 Index ($SPX) and Dow Jones Industrial Average ($DOWI) have climbed to record highs.
Specifically, Alphabet (GOOG) stock - which is otherwise up a healthy 19.6% YTD - is not only slightly underperforming the Nasdaq Composite ($NASX), but is in correction territory after having fallen over 13% from its 2024 highs. In this article, we’ll see what’s wrong with the Google parent, and why it looks like a good stock to buy ahead of its Q3 earnings.
Why Has Alphabet Stock Looked Weak?
Alphabet has been battling multiple issues, both on the business and regulatory level. Its Q2 earnings failed to impress markets, despite a beat on both the top line and the bottom line, as YouTube missed consensus revenue estimates.
Over the long term, Google faces the prospect of losing its dominance in the search market to OpenAI - whose valuation reached $157 billion in the most recent funding round, highlighting investors' faith in the startup.
Then there are regulatory woes, as Google lost the antitrust case related to its exclusive search arrangements with its Android devices and Apple (AAPL) iPhone and iPad devices. Reports of the Justice Department planning to break up Alphabet and forcing the company to divest the Chrome browser and Android operating system have added to the gloom, and made markets wary of the Mountain View-based company.
Furthermore, despite improving its artificial intelligence (AI) capabilities, Alphabet has failed to shed the perception that it is lagging behind Microsoft (MSFT)-backed OpenAI. At least three brokerages - Rosenblatt, Bernstein, and Loop Capital - downgraded GOOG from a “buy” to a “neutral” equivalent rating this year, as the company continues to battle on multiple fronts.
Wall Street Says GOOG Stock is a ‘Strong Buy’
That said, at least some sell-side analysts are slowly warming up to GOOG, considering that Citi listed the stock, along with Uber (UBER) and Amazon (AMZN), as top picks ahead of the Q3 earnings. Pivotal Research also initiated coverage on Alphabet with a “buy” rating and a $215 target price.
Overall, Alphabet has a consensus rating of “Strong Buy” from the 46 analysts covering the stock. It is rated as a “Strong Buy” by 35 analysts, while 3 rate it as a “Moderate Buy.” The remaining 8 analysts rate the stock as a “Hold” or some equivalent. GOOG’s mean target price of $202.93 is 20.4% higher than Friday's closing price, while the Street-high target price of $225 implies an upside of 33.5%.
Here’s Why Alphabet Stock Looks Like a Buy Ahead of Its Q3 Report
I believe the negatives look baked into Alphabet’s stock price ahead of the company’s upcoming Q3 earnings. The stock trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 20.6x, which is the lowest among its “Magnificent 7” peers. While that dubious distinction usually rests with Meta Platforms (META), the Facebook parent has seen a rerating after delivering strong top-line and bottom-line growth over the last few quarters, while also impressing markets with its AI efforts.
That said, the AI race is currently in the first lap of what looks like a long, drawn-out marathon. While Alphabet might not be the “winner” just yet, the race is still wide open. As veteran AI researcher Oren Etzioni said, “It’s a marathon, and it’s anybody’s race to win.” Etzioni added, “Technically it’s always been the case that Google’s capabilities were top-notch. They were just more conservative in rolling things out.”
Alphabet also has other growth drivers that are currently not contributing to its bottom line; for instance, the Waymo self-driving unit that has partnered with Uber to offer driverless ride-hailing in Atlanta and Austin. Cloud could be another growth driver for Alphabet; that segment posted quarterly revenues of $10 billion in Q2 and an operating profit of $1 billion for the first time.
Overall, I find GOOG stock to be a good buy at these prices, especially at a time when broader market valuations appear a bit stretched. While a section of the market is fearful about the stock, it might pay to get a bit greedy here and snag this growth stock ahead of its turn in the Q3 confessional.
On the date of publication, Mohit Oberoi had a position in: GOOG , META , AMZN , AAPL , MSFT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
