Alphabet Lower Despite Tier One Upgrade

Alphabet Inc. (GOOGL) is trading flat in Tuesday’s pre-market after Stifel raised the firm’s rating to ‘Buy’ with a $2,350 target. The stock may be undervalued, with a price-to-earnings ratio compared to the SP-500 index of 1.3,  or about one standard deviation below the average of 1.4 times. However, it’s also expensive on a long-term basis, averaging 28 times the company’s current P/E ratio, compared to an average of 25 times.

Cyclical Advertising Recovery

The tech giant is highly dependent on search engine advertising revenue, which far exceeds other sources of income. This profit driver is highly cyclical and still in recovery mode following the worldwide lockdown in the first quarter of 2020. High unemployment rates and shuttered businesses continue to weigh on ad growth but the long-term outlook is excellent, given the distribution of effective vaccines in most parts of the world.

Stifel analyst Scott Devitt upgraded Alphabet to ‘Buy’ from ‘Hold’, noting “the bounce in advertising dollar flows has followed online consumer engagement, a quick return and redistribution of advertiser appetite, and digital transaction proliferation. Looking forward, we have increased confidence in Alphabet’s positioning to benefit from category recovery (travel, entertainment, media, auto) and more durable share capture in categories such as retail due to relevance as an internet gatekeeper.”

Wall Street and Technical Outlook

Wall Street consensus is euphoric, with a ‘Buy’ rating based upon 38 ‘Buy’, 5 ‘Overweight’, and 2 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $1,477 to a Street-high $3,000 while the stock is set to open Tuesday’s session about $350 below the median $2,400 target. This low placement suggests investors will remain cautious until the Apr. 27 earnings release.

Alphabet broke out above the February 2020 high at 1,532 in July, tested new support for four months, and took off in a trend advance that posted an all-time high at 2,153 in February 2021. Price action has settled into a trading range with support at 2,000 while three rally attempts have faded above 2,100. These aborted impulses have forced weekly relative strength readings to cross into sell cycles, predicting rangebound action through the first month of the second quarter.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.