The stock of Alphabet (NASDAQ: GOOGL) drew the market’s attention yesterday after Lloyd Walmsley, an analyst at UBS, downgraded the stock to neutral from buy, citing a short-term negative impact on revenue from AI-based search applications. The stock of Alphabet ended Tuesday’s trading session at $118.33, almost flat from its prior close.
Specifically, the analyst downgraded the tech behemoth on short-term monetization concerns and “limited upside” to growth forecasts. Concerning competition, the UBS analysts do not perceive ChatGPT or Bing as notable risks, as they regard the Google search platform as outstanding. Nonetheless, he expects a slight level of “tail risk” from Meta, considering its AI chat facility.
In a note to clients, the analyst wrote that Meta’s AI chat has the potential to gain momentum, given the significant number of clients spanning its applications. However, Walmsley regards this assertion as somewhat speculative. The analyst’s initial apprehensions about the financial costs associated with GenAI have been mitigated, albeit there are still short-term threats. In the preceding quarter, the enterprise raised its capex outlook and emphasized a preference for technical facilities that depreciate more rapidly. Therefore, although the cost and threat of competition are less severe, as per the analyst, there are still lingering aspects of these risks.
To sum it up, Lloyd Walmsley underlined four major concerns that prompted him to stay away from the stock. These concerns include fewer chances of a further upward revision to prevailing high-single-digit growth forecasts, potential risks to revenue in the medium-term, the possibility of GenAI investments negatively impacting the increase in operating income margin, and a more favorable risk-reward ratio observed in comparable tech stocks such as Meta Platforms (NASDAQ: META) and Amazon (NASDAQ: AMZN).
Based on the above facts, Walmsley lowered the stock’s rating, as mentioned above, to neutral from buy. However, the analyst upwardly revised the price target of Mountain View, California-based Alphabet to $132 per share from the previous guidance level of $123. Nevertheless, Walmsley observed that the risk-reward ratio is evenly distributed, or “balanced.”
Notably, analysts have an extremely bullish view of the stock of Alphabet. The stock enjoys a buy rating from the authors of Seeking Alpha. Likewise, Wall Street analysts and the quant system Seeking Alpha have given a strong buy rating to the stock of Alphabet.
The rating downgrade is expected to keep the stock range bound in the short term.
The historical price chart indicates that the stock of Alphabet is declining after facing resistance at 125. The next support is anticipated to be near 110. Additionally, the stock has closed below its 50-day moving average, while the MACD indicator is showing a negative reading. Therefore, we anticipate the stock of Alphabet to remain in a downtrend in the short term.
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