Is Google The Buy Of The Summer?

It’s been an unpredictable kind of year for most tech companies, and Alphabet, known to many as Google (NASDAQ: GOOGL), is no exception. The search engine behemoth managed to tag an all-time high this past February but has fallen as much as 30% in the six months since. Rising interest rates, soaring inflation and recession fears have combined to hurt even the biggest of the tech giants, but there are more than a few signs starting to suggest that a turnaround is on the cards. 

For starters, the California-headquartered company released fresh earnings this week that gave investors plenty to think about. While both the revenue and EPS prints missed what analysts had been expecting, the feeling was they hadn’t been as bad as many thought they would be in the aftermath of Snap’s (NASDAQ: SNAP) results. The latter reported dismal numbers last week, to the extent that many thought Google’s numbers would be far worse than what was forecasted. But thankfully for investors, this wasn’t the case. 

Bullish Comments

Leadership struck a deservedly bullish tone, with CEO Sundar Pichai saying “in the second quarter our performance was driven by Search and Cloud. The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term.” Ruth Porat, CFO, added that “our consistent investments to support long-term growth are

reflected in our solid performance in the second quarter, with revenues of $69.7 billion in the quarter, up 13% versus last year or 16% on a constant currency basis. We are focused on responsible capital allocation in support of our growth opportunities.”

The feeling across Wall Street was that despite missing analyst expectations, this was actually a better than expected report on the whole. Evercore ISI analyst Mark Mahaney, who maintained his Outperform rating on Google, noted that the company's fundamentals are holding up better than expected. He did see fit to lower his price target to $140 from $155.50, noted that ad revenue grew roughly 5% sequentially in constant currency, compared to 7% growth in the second quarter of 2019. However, this came on a revenue basis of 80% higher than two years ago, something the analyst deemed "impressive." And even with his trimmed price target, Mahaney is pointing to upside in the region of 20% from where shares closed on Thursday night. 

In a note to clients he wrote "investments and innovations that the company has made around its core Ads business are paying off, with its somewhat recently launched Performance Max campaigns a recent example," adding that the stock is "highly attractive" at 16 times earnings. This positive assessment of Google’s valuation was echoed by his peer over at Truist, where analyst Youssef Squali noted that Google showed "strong resiliency" in the quarter, and while results were seen as "virtually in line" and there was some weakness in YouTube, it looks as if the stock can start to rise again.

Thinking About A Position

These are obviously solid comments backing the long side, and the fundamental viewpoints from the likes of Mahaney and Squali are supported up by a quick technical analysis of the chart. Since setting a 52 week low at the end of May, Google shares have largely traded sideways as they consolidated in a narrow range. Aside from a very red day earlier this week, in which they followed the broader market down, their shares have effectively been setting higher lows and higher highs in the past two months. This has them starting to look like being on the verge of a textbook breakout to the north. 

Investors getting involved around here have a very clear support line at the $105 level to plan an emergency exit around, while to the upside there’s no reason to be selling at all really if shares conclusively break above the $120 mark. With Microsoft (NASDAQ: MSFT) having also released better than expected numbers this week, there’s a decent argument to be made for continuing to ignore the more speculative side of tech like Snap, while at the same time starting to think about backing the heavyweights that are turning the tide by themselves.