The stock of Alphabet (NASDAQ: GOOG), the parent company of internet search engine giant Google, declined last Thursday, after analysts downgraded the stock to a “hold” rating, from a “buy” rating issued earlier. It can be remembered that a week earlier, Goldman Sachs, the investment banking giant, advised investors to avoid leaning too much on tech stocks such as Facebook, Microsoft, Amazon, Apple, and Google. So, following the downgrade, the market has become a bit jittery about holding tech stocks at the current valuations. Thus, we expect a short-term weakness in the stock of Alphabet.
In a report sent to clients, Michael Graham, an analyst at Canaccord Genuity, had mentioned that there is a growing concern about the valuations of the most popular tech stocks. On that basis, Graham downgraded the stock of Alphabet to “hold”, from the prior “buy” rating.
Graham justified his downgrade for three reasons. Firstly, he believes that the growth achieved in the past two years is hard to repeat as they were mainly due to an increase in ad load on YouTube and mobile search. Secondly, on the basis of an in-depth segment analysis, Graham came to the conclusion that the current gross margin estimates are too high and so Alphabet may not be able to meet the earnings estimates. Finally, according to Graham, Google, which is currently trading at a forward PE ratio of 24x, looks expensive by historic valuation.
The FANG (Facebook, Amazon, Netflix, & Google) stocks have gained more than 20% so far this year, compared to a 9% gain of the S&P 500. While reconfirming the target price of $1000 for Google, Graham stated that the company would find it tough to maintain the current growth rate in 2018. The overall negative sentiment about tech stocks, created by the market analysis reports of Goldman Sachs and Canaccord Genuity, is expected to keep the stock of Alphabet bearish in the short-term.
The price chart indicates resistance for the stock at 960. The stochastic oscillator is in the bearish zone. This and the gap that exists between 875 and 902 indicates that the stock would come down further. So, it would be prudent to have a short position in the scrip.
By investing in a put option, we would like to mimic a short position in the stock of Alphabet. Additionally, June 28th would be our choice of options expiration date. The trade would be opened only when Alphabet trades near $960 in the NASDAQ.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
