Alphabet's stock has never been this cheap relative to Meta's. How to play that.

By Emily Bary

A Bernstein analyst says it's still 'difficult to defend' pitching Alphabet shares with conviction given various regulatory and competitive risks

Are Alphabet Inc. shares a bargain - or justifiably cheap?

That's a question Bernstein analyst Mark Shmulik recently explored, as he noted some striking data points. For one, Alphabet shares (GOOG) (GOOGL) are trading at nearly their largest-ever discount to the S&P 500 SPX when looking at forward price-to-earnings multiples, and the actual record discount was set just a few weeks ago.

The stock is also trading at its largest discount to Meta Platforms Inc. shares (META) on record.

If you looked at the Google parent company's forecasts without knowing the company behind them, you would likely be tempted to buy, Shmulik said. Shares are trading at 19 times forward earnings estimates but the company is projected to grow revenue at a 11% annual clip through 2027. Alphabet could also grow compound annual earnings per share at a 15% rate over that span.

"Surely this must be a generational buying opportunity, be strong when others weak, brave when others are fearful, or really just plug your nose and buy, right?" Shmulik asked.

But he sees a more nuanced picture as he considers Alphabet's regulatory and competitive risk. "We've been closely tracking the competitive landscape and the regulatory outcomes and believe it's highly unlikely that Google comes out unscathed," he wrote.

On the antitrust front, Alphabet is battling the government over its search, Play app-store and network businesses. While the company intends to appeal its losing search verdict, Shmulik estimates that that 20% to 25% of the company's search distribution channel could be in jeopardy.

See: Google faces new antitrust trial after ruling declaring search engine a monopoly

"In a worst-case scenario for Google, Google can't pay for search placement leaving Bing, Apple or another competitor to take over as the default across all distribution channels" currently covered by the company's revenue-share and information-sharing agreements, he wrote.

From a competitive standpoint, there's also some risk around generative artificial intelligence, given OpenAI's "first-mover advantage" and Apple Inc.'s (AAPL) slower entry into the market. The new Apple Intelligence software could make it so people ultimately do less of their inquiring through web browsers, he reasoned.

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"It seems the market can't make up its mind on whether Google's an AI loser - with gen AI raising terminal risk questions around query share and monetization - or an AI winner via Gemini and Cloud."

Even with the valuation gap, Shmulik still favors Meta shares. He rates Alphabet shares at market-perform with a $180 target price, while rating Meta shares at outperform with a $600 target.

"It's difficult to defend a high-conviction long Google pitch toinvestment committees, especially with Meta 'easier' and firing on all cylinders," he wrote.

-Emily Bary

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09-26-24 1649ET

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