Google Just Got Upgraded, Should You Buy?

As markets continue to rebound from one of the most vicious sell-offs in history, many investors are looking for quality stocks that are trading at significant discounts to where they were a month or two ago. While overall volatility is still elevated, there’s no doubt that attractive buying opportunities exist.

The folks over at BMO Capital Markets weren’t slow about making a big call this week when they upgraded shares of Alphabet, better known as Google (NASDAQ: GOOGL), to outperform. The stock had fallen about 35% from an all-time high in February through last week and has since bounced 15% off the lows. BMO’s optimism stems from their conviction that large internet stocks will do well as COVID-19 retreats and the economy rebounds.

Well Diversified Business

Smaller companies might lack the resources and diversification needed to ride out the downturn in the meantime. However, Google has impressive exposure to some of the largest companies and industries and even from an online ad revenue perspective, they’re expected to outperform their well-known rivals Facebook (NASDAQ: FB). As a simple example, consider Google’s YouTube business. With almost everybody ordered to remain at home for the foreseeable future, viewer’s screen time and subscriptions are expected to easily surpass previous forecasts.

Aside from Google search ad revenue and Youtube ad revenue, they’re also continuing to see growth in their Google Cloud business. This is one of the main competitors to Amazon’s AWS and is well-positioned to capture much of the market share in the ever-expanding cloud server space.

A $1,400 price target from BMO puts shares back to where they were trading at the end of February and considering at current levels they’re only back at last August’s levels, that shouldn’t be too much of an ask. With $115 billion in net cash, investors might also be expecting some strategic investments or buybacks from forward-looking management in the coming months.

Potential Difficulties

It may not be all plain sailing for Google, however. In contrast to BMO, SunTrust actually slashed its price target for the stock last week and struck a more cautious tone regarding its outlook. They believe a weaker ad environment will continue through the rest of 2020 and that it’s still too early to be calling any kind of bottom in the market.

Last week, Facebook gave us a good example of how increased screen time and engagement does not always yield increased revenue. They’ve seen a 50% jump in total messaging in the countries most affected by coronavirus while time in group calls has increased by 1000% in Italy alone. However, they’ve never really focused on monetizing these services so aren’t reaping any financial benefit from the jump just yet.

Getting Involved

Still, Google has a well-oiled machine that has been consistently increasing net income, year in and year out. Technically, shares bounced off a strong, multi-year support line last week and any move back towards the $1,000 level should be seen as a gift.

Google commands over 90% of the mobile search engine market share and will likely continue in its role as a leader in the digital ad space for many years yet. They have the resources to ride out the current uncertainty and a business model that will arguably do better due to more people than ever remaining indoors. There’s no doubt that Google’s best years are ahead of them and at current levels, long term investors should seriously consider shares to be trading at a significant discount.