Why Canaccord Genuity Is Taking a Step Back on Alphabet

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The FANG stocks have been a powerful force in the market, taking up a good portion of many portfolios. These stocks have been known for their incredible growth over the past few years, but are they slowing down since the markets hit new highs? One analyst thinks that at least one component is slowing.

Canaccord Genuity gave its last update on FANG six months ago, and since then those stock have trounced the S&P, with Facebook, Amazon, Netflix and Alphabet up 31%, 31%, 30% and 27%, respectively, compared with the S&P’s gain of 11%.

Canaccord Genuity has seen several theories attempting to explain this outperformance, including several centered on the rise of passive investing fueling momentum buying. The firm believes simply that these four stocks represent a large portion of the growth opportunities within large cap tech, and six months ago all the valuations were quite reasonable. It still largely believes in the growth, but the valuations are a bit less obvious. That said, Canaccord Genuity still believes the group overall should reward investors, but it is taking a step back on Alphabet Inc. (NASDAQ: GOOGL).

Canaccord Genuity downgraded Alphabet to a Hold rating from Buy with a price target of $1,000, versus a $967.93 closing price. According to the firm:

We think this year is fine, and next year has a very good chance at achieving the sentimental 20% Google Properties growth level. However:

  • We think much of the growth over the past two years is due to ad load increases on mobile search and YouTube, which (especially the former) will be hard to repeat;
  • Our refreshed detailed segment analysis suggests firmly that consensus gross margin estimates are too high, and while revenue growth mostly makes up for this, we believe this limits the potential for upward EPS revisions; and
  • GOOGL’s P/E multiple of ~24x is expensive by historical standards, and puts the stock within a pitching wedge of our $1,000 price target

Shares of Alphabet were last seen down 2% at $946.18 on Thursday, with a consensus analyst price target of $1,060.17 and a 52-week range of $672.66 to $1,008.61.