Google Was Just Downgraded, But This Could Be A Good Thing

Key Points

• UBS and Bernstein downgraded Google shares to a Neutral equivalent this week. 
• After a 50% run since November, they think the stock is in for a breather. 
• However, both remain bullish on the long-term potential, which is good for us. 

After watching their shares rally by more than 50% from last November, it must have been a kick in the teeth for Alphabet Inc NASDAQ: GOOGL, better known as Google, to receive two downgrades this week. But that's exactly what came from the teams over at UBS and Bernstein. Not all hope is lost for this rally, however. Let's take a closer look at what the analysts said and see why this could end up being a good thing for Google shares.   

The first downgrade came from UBS on Monday, with the team there focusing on the aforementioned rally but viewing it almost as a negative. In the context of further room for it to run, they expressed concerns about its growth potential as well as some near-term challenges in making money.

Analyst Lloyd Walmsley and his team adjusted their rating on Google shares from Buy to Neutral. He explained that he finds it hard to see big revenue growth for Google Sites, expecting it to be in the single-digit range. Walmsley also mentioned a potential risk to revenue in the medium term as new search features replace ad space with generative AI responses.

AI Concerns

In a note to investors, Walmsley noted that although worries about the cost of generative AI have eased, investors still have some short-term risks to consider. He highlighted that Google raised its spending plans in the last quarter and emphasized a preference for quicker-depreciating technical infrastructure. While Walmsley now sees the cost and competition as less severe, he still feels that some risk remains.

Then shortly after the bell rang to start yesterday's session, Google faced its second downgrade, this time from investment firm Bernstein. The team there echoed the concerns of UBS, saying the downgrade was primarily driven by the tech giant's 40% surge in stock value since November last year.

Mark Shmulik and his team revised their rating on Google shares from Outperform down to Market Perform, the equivalent of UBS' Buy to Neutral move. Shmulik raised similar concerns about Google's ambitious integration of generative AI into core search results, which could potentially result in a decline in search ad pricing, albeit a short-term one. 

Considering A Position

That the advent of AI is considered to be a headwind to the stock will be a frustrating pill for Google investors to swallow. This will especially be the case given they get to watch the shares of tech peers like NVIDIA Corporation NASDAQ: NVDA or Apple Inc NASDAQ: AAPL reap the reward, and understandably, Google shares sold off through both Monday and Tuesday's sessions. However, we here at MarketBeat see this as a good thing, with a potentially solid entry point opening up. 

Neither Shmulik nor Walmsley was bearish enough to downgrade Google shares to a full Sell rating, nor were they overly bearish on the stock's longer-term potential. In many ways, they're calling for some sideways action and for the stock to consolidate after the ripping run it's had, which mightn't be a bad thing for those of us thinking about getting involved. 

There are few things more frustrating for an investor than chasing a stock higher with entries that never get filled. So if Google stock is going to trade sideways for a while, it gives us the opportunity to properly gauge where new support and resistance lines may be and work entries around there with more confidence of them being filled. 

And the cherry on top? Even though they downgraded the stock, UBS still raised their price target on Google shares from $123 to $132. Sure, it came with the caveat that the risk-reward balance is more even now rather than being strongly in favor of significant gains, but it still points to a further upside of more than 10%. If that's to be expected from a stock that's set to take a breather, then any further weakness from these downgrades truly will become a great entry point for the long term.