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BMO Capital Favors Alphabet Stock over Facebook

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Google-parent Alphabet (NASDAQ:GOOG) stock closed 3.25% higher on March 30 after getting an upgrade from a Wall Street analyst. The stock ended the trading day at $1,146.82. Alphabet stock was trading 25.1% below its 52-week high of $1,532.11 and 13.1% above its 52-week low of $1,013.54. At Monday’s closing price, Alphabet’s market cap was around $788.03 billion. The stock has fallen 14.4% this month as of Monday amid the coronavirus outbreak. The stock has also lost around 14.2% YTD (year-to-date).

Notably, Alphabet is a part of the so-called “FANG” stocks, which include Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), and Netflix (NASDAQ:NFLX). Like Alphabet, Facebook stock has declined 19.1% YTD. The coronavirus spread has hit the digital advertising business. In contrast, Amazon and Netflix stocks have risen by 6.3% and 14.6% YTD, respectively.

BMO Capital upgraded Alphabet stock

On Monday, BMO Capital upgraded Alphabet stock amid the coronavirus pandemic. BMO Capital analyst Daniel Salmon upgraded the stock to “outperform” from “market perform.” However, he reiterated the target price of $1,400, which is at a premium of 22.1% to the current price of $1,146.82.

Salmon favors Alphabet stock over online ad-revenue rival Facebook, as reported by MarketWatch. According to Salmon, Alphabet has the upper hand in the Internet industry. As a result, the stock could gain when the economy recovers from the coronavirus crisis. He said that the company has high exposure to large enterprises, which makes it more resilient to the COVID-19 outbreak. Salmon expects a surge in Alphabet’s YouTube subscriptions. More consumers are staying home due to lockdowns amid the coronavirus pandemic.

Meanwhile, if we consider Amazon stock too, then Salmon would pick the e-commerce retailer over Alphabet and Facebook. He said that Amazon’s advertising business is more resilient during the virus pandemic.

Advertising revenues

Google’s advertising revenue growth was 16.2% in the fourth quarter, while Facebook’s ad revenue growth was 25%. In comparison, Amazon’s advertising revenues increased by 41% in the fourth quarter. Small businesses have closed due to the coronavirus outbreak. Many companies have also scaled back their operations, which might result in reduced advertising spending. For example, Apple has shut down most of its retail stores. Walt Disney (NYSE:DIS) has also closed many of its theme parks. McDonald’s closed its business operations in China due to the outbreak. Gap, JCPenney, Macy’s, and Nordstrom announced temporary store closures in the US in a bid to curb the spread of the deadly coronavirus.

Alphabet’s financial performance

In February, Alphabet’s revenues of $46.08 billion missed analysts’ estimates of $46.9 billion in the fourth quarter. However, the adjusted EPS of $15.35 per share beat analysts’ expectations of $12.53.

Alphabet’s revenues grew 17% YoY to $46.08 billion in the fourth quarter due to advertising revenues. Google’s advertising revenues increased by 16.2% YoY to $37.93 billion in the same quarter. The advertising revenues also improved from $33.91 billion in the previous quarter. YouTube’s advertising sales also grew 31% YoY to $4.72 billion in the fourth quarter. Alphabet CEO Sundar Pichai delivered Google Cloud revenues of $2.61 billion compared to $1.71 billion in the same quarter the previous year.

Google’s “other revenues” generated $5.26 billion in the fourth quarter, which was higher than $4.77 billion in the same quarter the previous year. Notably, “other revenues” come from hardware, Play Store, and non-advertising YouTube revenues. However, the “other bets” category, which comes from Verily, Waymo, and Fiber, generated revenues of $172 million in the fourth quarter. Notably, the sluggish “other bets” lost $2,026 billion compared to the same quarter in the previous year.

Analysts’ recommendations

Among the 39 analysts covering Alphabet stock, 35 recommend a “buy,” while four recommend a “hold.” None of the analysts recommend a “sell” on Alphabet stock. Analysts have given the stock a consensus target price of $1,540.18, which implies a 12-month return potential of 34.36%. Currently, the stock isn’t overbought or oversold. Alphabet stock has a 14-day relative strength index score of 44.39.

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