The back story. Despite rising regulatory scrutiny, shares of Google parent Alphabet (ticker: GOOGL) have gained nearly 27% in 2019. Facebook stock (FB), facing similar pressure from regulators, has soared 52%. By comparison, the S&P 500 index has gained 24%.
Stifel analysts recently had Hold ratings on both. Scott Devitt, who covers Alphabet for Stifel, had concerns about slowing revenue growth in the first quarter. John Egbert covers Facebook and has felt that it was unclear how the stock would break out of its 18- to 24-month trading range.
What’s new. Both analysts said in a note on Thursday that it is time to buy Facebook and Alphabet.
For Alphabet, Devitt is upbeat about improved monetization of Google’s search engine, because changes to search-engine optimization have made it more difficult for companies to jockey for the top of search results.
He also cited innovations seen in ad-product introductions, such as on the Google Discover feed, the YouTube home feed, and Gmail promotions and social tabs. “Google also expanded Showcase Shopping ads to Google images, the Discover feed, and YouTube (plus a new UI in November), which further expands Google’s Shopping presence,” he wrote.
Though the Google cloud business is a relatively small contributor to Alphabet’s top line, he thinks it could become more meaningful to the company’s growth.
For Facebook, Egbert is more positive about the company’s ability to drive continued ad-revenue growth, maintain healthy user growth and engagement, and better align expenses to deliver operating leverage in 2020 and beyond.
Alphabet stock gained 0.6% to $1,326.96 on Thursday, while Facebook stock rose 0.3% to $199.36. The
Index was essentially flat.
Looking ahead. The Stifel analysts upgraded both stocks to Buy from Hold. Alphabet’s new price target is $1,525, up from $1,325. Egbert raised his Facebook price target to $240 from $215.
Devitt also thinks that Google CEO Sundar Pichai becoming chief executive of the parent company will mean a more-streamlined management structure, something he sees as a positive for investors. “Though it is too early to determine what any changes in approach, if any, Pichai will bring to the Other Bets portfolio, we believe he will keep the long-term portfolio objectives focused with investors in mind,” he wrote.
Egbert noted that Facebook’s valuation appears to be cheap compared with similar low-revenue-growth blue-chip stocks. And his price target, at 19.8 times estimated 2021 earnings, is significantly cheaper than companies forecast to grow slower than Facebook’s 2019-to-2021 estimated compound annual growth rate. They include
Write to Connor Smith at [email protected]