Idea of the Day Google

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By :  ,  Financial Analyst

What: With UK elections and the ECB tomorrow’s story, today we decided to look across the Atlantic for some inspiration. The Fangs– the Silicon Valley technology giants including Facebook, Amazon, Apple, Netflix and Google (listed as Alphabet Inc.) – are piquing our imagination on this slow Wednesday. The chart below shows how these tech titans have performed relative to each other so far this year. As you can see, Amazon has been the top performer, with Netflix, Facebook and Apple closely following behind. Meanwhile Google has been the key underperformer.

Interestingly, Googly (Alphabet inc.) climbed above $1000 a share earlier this week, and joined Amazon in the exclusive $1000 a share club. However, we believe that Google won’t be able to keep pace with the Fangs in the long term, and on a relative value basis we see continued underperformance of Google relative to Apple, in particular.

How: It is worth noting that our relative value idea is not looking for a collapse in Google’s share price, just for it to continue to underperform relative to the rest of the Fangs. We think that there are two important fundamental reasons why Google may underperform companies such as Apple in the coming months:

  1. Relative value: Google is trading at 33x earnings, compared with 18 x earnings for Apple. Although Facebook, Amazon and Netflix have far higher P/E ratios, we think that Google’s relative maturity compared to Facebook and Netflix, in particular, means that investors will be particularly sensitive to Google’s P/E ratio, which could make it less attractive in investors’ eyes compared to Apple.

2.       Outlook: Although Alphabet’s earnings beat forecasts for the first quarter of the year and its stock rallied to a record high on the back of these results, Alphabet’s cost-per-click, a key revenue generator, was down 19% year over year. That was the biggest decline since 2014. Alphabet’s other companies outside of Google, also experienced a $774mn loss in the first three months of the year, relative to 2016. This is a clear sign that Alphabet is still reliant on Google, and that Google is facing stiff competition from its rivals to secure advertising revenue.

Overall, we believe that Google’s sheer size means that it has to be included in the Fangs, however, it is likely to continue to be a laggard, and underperform its rivals in the tech space in the coming months.

Chart 1:


Source: City Index and Bloomberg 

Related tags: Google Wall Street

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