Shares of Google parent Alphabet (GOOGL) were higher on Monday morning after an analyst at Pivotal Research upgraded the stock to Buy on the belief shares will outperform the other large cap Internet names in 2020 as estimates move higher. At the same time, an analyst at Loop Capital said he believes antitrust is likely to be an even greater piece of the stock narrative for Alphabet this year.
'MULTIPLE WAYS' FOR ALPHABET SHAREHOLDERS TO GET PAID: Pivotal Research analyst Michael Levine upgraded Alphabet to Buy from Hold with a price target of $1,650, up from $1,445. Levine told investors in a research note that he believes shares will outperform the other large cap Internet names in 2020 as estimates move higher. The analyst, who said he is optimistic that the company's newly appointed Chairman and CEO Sundar Pichai is a positive for shareholders, added that he is "incrementally more constructive" about what he sees as "multiple ways to get paid" under the recently anointed Pichai regime. He said the change in the guard offers the most optionality for multiple expansion for the stock he has seen in years, specifically saying that he thinks there is an opportunity for a change in guidance philosophy and the chance to change capital allocation strategies from instituting a larger buyback and potentially instituting a dividend.
Pivotal's Levine is also more constructive on Google Cloud under Thomas Kurian, seeing 2019 as a "critical foundation year" with the narrative continuing to improve this year and beyond. The analyst said he believes Kurian's hiring is "akin" to Keith Block being hired at Salesforce.com (CRM) in 2013, who "radically" changed the Salesforce culture and business for the better. He noted that Kurian has wasted no time making some decisive hires, and views the $2.6B Looker deal which closed in June 2019 as "notable," saying it is validation that Kurian has been enfranchised with a check book for acquisitions. Levine contended that "We are just seeing Kurian get his key lieutenants in place and there is a multiyear journey before we believe GCP will become more enterprise street legitimate."
Levine also added that he is "encouraged by the durability" of Google's revenue growth despite no real contribution from Google Discover ads. The latter "could be needle moving" in 2020, Levine contended. The analyst further stated that given that the company doesn't guide, he sees how along with an easy Q1 comp makes this likely the safest and cleanest of the large cap names to own through at least the 2Q20 print in July.
ANTITRUST OVERHANG: Loop Capital analyst Alan Gould also issued a research note on Alphabet on Monday. Gould said that he believes antitrust is likely to be an even greater piece of the stock narrative for Alphabet this year with issues bubbling up in many regions around the world, including in the U.S., where an investigation by 50 state attorney generals is the big focus. At minimum, Gould said this is a "large distraction" and headline risk, with little question and specific abuses of market power will be debated. Whether Google has violated any laws will be debated, but Gould said there are many long-standing complaints, numerous examples of competitive harm imposed by its market power.
Loop's Gould added that he does see "undesirable consequences," but is bearish on the ability of policy makers to comprehend the technology landscape and implement sensible remedies. He added that he believes that an environment with heightened scrutiny over abuse of monopoly power may not be the best for strong monetization gains and/or show of margin leverage, and that with the stock trading at nearly its cycle-average P/E premium to the market, he sees more likelihood for multiple compression.
Gould made no change to his Hold rating and $1,450 price target. He expects Alphabet to trade in the lower portion of its recent historical range as he expects the company will remain a primary target for "big tech" regulation for the foreseeable future.
PRICE ACTION: In morning trading, shares of Alphabet Class A shares are up up 2.5% to $1,395.10.
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