Growth stocks have rebounded amid easing concerns over a U.S. recession and the rising odds of a Fed rate cut in September. However, many still trade below their 2024 highs, and the tech-heavy Nasdaq Composite ($NASX) is also nearly 6% below its all-time highs. Alphabet (GOOG), in particular, has fallen out of favor with markets over the last month, and has lost more than 11% over the period, which is much deeper than the drawdown in broader markets.
In this article, we’ll discuss what’s making markets apprehensive about GOOG, and why it looks like a good growth stock to buy this August.
Why is GOOG Stock Underperforming?
GOOG stock hit its all-time highs in the first half of July, and has looked weak since. Its Q2 earnings failed to impress markets, despite a beat on both the topline and the bottom line. The company’s cloud revenues were also higher than what analysts were expecting, as the segment posted quarterly revenues of $10 billion and an operating profit of $1 billion for the first time. However, YouTube’s growth came up short of Wall Street's estimates, which apparently led to the post-earnings sell-off.
Then came the announcement of OpenAI launching SearchGPT, which ignited concerns over Google’s ability to protect its lead in the search market. There have been intermittent concerns over Alphabet losing out in the artificial intelligence (AI) race to rivals like ChatGPT.
The broad-based tech sell-off soon followed, but even as tech stocks have recovered most of their losses from that period, Alphabet’s recovery has been quite tepid. Reports of the Justice Department planning to break up Alphabet and force the company to divest the Chrome browser and Android operating system have added to the gloom, and made markets wary of the Google parent. Notably, Google also lost the antitrust case related to its exclusive search arrangements with its Android devices and Apple (AAPL) iPhone and iPad devices.
Is the Sell-Off in Alphabet Stock Justified?
I believe the extent of the sell-off in Alphabet stock is not justified. First, the concerns over YouTube are unfounded, as the platform will stand to benefit from continued cord-cutting and the shift of ad dollars from linear TV to platforms like YouTube and Netflix (NFLX).
YouTube has been the most watched streaming platform on U.S. TV screens for 17 consecutive months, according to data from Nielsen, and the company has still a lot of legroom to monetize YouTube users - including by pushing paid subscriptions.
As for Google losing out to AI rivals, I would say that these are still early days. The company’s AI endeavors have been mixed, but it has shown progress since Bard’s disastrous debut in 2023.
The risk of regulatory scrutiny is real, though, and there is a global clamor that Big Tech companies have gotten too powerful. However, it is an industry-wide concern, and not limited to Alphabet.
Incidentally, Deepwater Asset Management's managing partner Gene Munster believes that while a Google split looks unlikely, it would be in shareholders' interest, as the sum of the parts valuation would be higher than the current valuation.
GOOG Stock Forecast
There are divergent views about Alphabet stock, though. A section of the market is circumspect on Alphabet’s outlook due to tougher comps in the second half of 2024, a significant increase in depreciation expenses in coming years on massive AI investments, and growing competition in the search and digital ad market. However, the consensus view is bullish on GOOG – even if not to the scale that we see with Amazon (AMZN), which is a top 2024 pick for many brokerages.
Alphabet has received a “Strong Buy” or “Moderate Buy” rating from 84% of the analysts covering the stock, while the remaining rate it as a “Hold” or equivalent. The stock’s mean target price of $203.76 is almost 24% higher than Friday’s closing prices.
Should You Buy Alphabet Stock?
To be sure, Alphabet faces several headwinds - and while it has won some “AI respect,” the company has yet to fully change the perception that it is behind the curve in AI initiatives. However, I believe these risks look factored into GOOG’s stock price, and the next 12-month (NTM) price-to-earnings multiple of 20.2x doesn't look demanding. Overall, I find Alphabet a good growth stock to buy at these prices, given its reasonable valuations and the continued progress it is making in AI.
On the date of publication, Mohit Oberoi had a position in: GOOG , AMZN , AAPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
