Alphabet Inc shares fell by 1.1 per cent on Monday, after UBS Group AG downgraded the company to neutral from buy. This shows the waning enthusiasm toward megacaps among Wall Street analysts.
Some analysts have questioned as to whether the rally in the major technology and internet stocks that have powered the market higher this year, but the scale of the move, along with concerns over valuation, have prompted questions whether the rally has much left to run, and what the next drivers of growth could be.
“It’s difficult to see upside to our current high-single-digit Sites growth estimates and consensus calls for acceleration to 11%,” wrote UBS analyst Lloyd Walmsley in his downgrade reported Bloomberg.
He also sees risks to Alphabet’s revenue related to generative artificial intelligence, ‘which may take time to optimize.’
After a 37 per cent gain in the stock this year, he added, the risk profile looks balanced.
The downgrade brings Alphabet’s consensus rating — a proxy for its ratio of buy, hold, and sell ratings — to 4.69 out of five, the lowest for the stock since December 2019. A year ago, the consensus stood at 4.96 out of five.
Wall Street analysts remain broadly positive on the stock.
Alphabet is not the only megacap that analysts are distancing themselves from. The consensus rating for Apple Inc. is at its lowest since November 2020, while Microsoft Corp.’s is at levels last seen in mid-2019.
Still, megacap tech remains a popular area of the market. In addition to the growth potential from AI, the companies are seen as offering strong balance sheets, and as durable drivers of earnings and revenue.
“Despite YTD outperformance and perceived frothiness in valuation levels, we conclude that Internet Mega Caps continue to trade at reasonable levels, both as compared to historical mean/median valuation levels as well as growth-adjusted valuation levels,” writes Rohit Kulkarni, an analyst at Roth MKM.
Kulkarni would buy the group ‘on any weakness’ and notes that ‘tactical market-led softness should be viewed as an opportunity to lower cost basis ahead of AI-driven fundamental inflection in 2024 and 2025.’
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Updated: 26 Jun 2023, 11:05 PM IST
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