Should You Get Greedy and Buy This Cheap Tech Stock for Q4?

With a YTD gain of just over 12%, Alphabet (GOOG)(GOOGL) is one of the worst-performing constituents of the “Magnificent 7” pack, and is also underperforming the S&P 500 Index($SPX). The Google parent’s outlook has been clouded by a court ruling that argues it holds a monopoly in the online search market. As a result, calls to break up the tech behemoth are rising, making markets fearful about the stock. Is it time to get greedy instead and buy Alphabet shares for Q4? We’ll discuss in this article.

GOOG Stock Forecast

While GOOG still has a consensus rating of “Strong Buy” from sell-side analysts, and its mean target price of $202.09 is about 27.1% higher than Monday’s closing prices, some analysts have grown cautious about the stock.

Alphabet currently has a “Strong Buy” or “Moderate Buy” rating from 82% of the analysts in coverage, while the corresponding number three months back was 86%. 

Rosenblatt, Bernstein, and Loop Capital have all recently downgraded GOOG from a “buy” to “neutral” equivalent rating, while Phillip Securities upgraded the stock to “buy” over the last three months. More recently, Evercore ISI lowered Alphabet's target price from $225 to $200 to start the week, while reiterating its “overweight" rating.

Key Risks That Alphabet Faces

To be sure, Alphabet stock is underperforming markets for a reason, as the company is facing several headwinds. 

First, the regulatory risk is currently running quite high, and Bernstein estimates that Google could face litigations worth $100 billion from advertisers it overcharged for ads. The brokerage also believes that given the regulatory heat, Google might be a lot less aggressive for now.

“The reality of an internet company is progress never stops. And if you’re going to be hampered, where maybe you’re fighting with one hand tied behind your back, it becomes a very difficult prospect to move as quickly as you’d like, and maybe as you need to,” explained Bernstein analyst Mark Shmulik. 

There is also a risk that regulators might seek to break up Alphabet in a bid to curtail its apparent monopoly.

Apart from the regulatory risk, Google’s core advertising business is facing significant challenges from competitors like Amazon (AMZN). With companies like Uber (UBER), Disney (DIS), and Netflix (NFLX) also betting big on the advertisement business, the market might see even more competition for ad dollars.

Finally, artificial intelligence (AI) could shake up the online search market - and while Google has so far maintained its lead, the game is Alphabet's to lose, given its dominant position. While the company has ramped up its AI efforts after the initial hiccups, the race is still wide open.

Is It Time to Get Greedy and Buy Alphabet Stock?

While GOOG faces some very potent risks, they should be seen in perspective. Alphabet stock trades at a forward price-to-earnings (P/E) multiple of 20.4x, which is the lowest among all Magnificent 7 stocks, and is a discount to the average S&P 500 Index member stock, too. 

While broader market valuations – especially for tech names – are generally running above their historical averages, GOOG is one of those rare stocks that's currently trading at a discount to its historical valuations.

Also, I believe there are several underappreciated assets in Alphabet’s portfolio – YouTube, for instance. YouTube has been consistently the most watched streaming platform on U.S. TV screens, according to data from Nielsen, and the company has still a lot of legroom to monetize YouTube users - including by pushing paid subscriptions.

It also has the Waymo self-driving unit, which recently partnered with Uber to offer driverless ride-hailing in Atlanta and Austin. Cloud could be another growth driver for Alphabet; that segment posted quarterly revenues of $10 billion in Q2, and an operating profit of $1 billion for the first time.

While the regulatory risk is real, I believe these risks look factored into GOOG’s stock price, and getting greedy about this underperforming tech stock might pay off for investors in the medium to long term - even though in the short term, the noise over its regulatory issues will continue to impact the price action.