UBS Downgrades Alphabet Stock, Identifies Enhanced Risk-Reward in Meta and Amazon

Alphabet’s stock has been downgraded by UBS analysts, who now rate it as Neutral instead of Buy. They have set a new price target of $132 per share, which is higher than the previous target of $123. The decision to downgrade is based on four key factors.

Firstly, the analysts believe that there is limited potential for significant growth in Sites, which currently only shows high-single-digit growth estimates. This implies that the stock may not offer substantial upside potential in the near future.

Secondly, there is a medium-term revenue risk that could impact Alphabet. The analysts have identified potential challenges that may hinder revenue generation in the coming months.

Thirdly, while Alphabet’s operating income margin may expand, there is a concern that investments in General Artificial Intelligence (GenAI) could offset this growth. The company’s allocation of resources to GenAI initiatives may impact its overall profitability.

Lastly, the analysts see better risk-reward opportunities in other stocks, particularly Meta Platforms and Amazon. They believe these stocks offer a more favorable investment outlook compared to Alphabet.

In terms of competition, UBS analysts do not consider Bing or ChatGPT as significant threats. They maintain that Alphabet’s Search function remains superior to these alternatives.

While there is a possibility that Meta’s AI chat could gain traction among its extensive user base, the analysts view this as speculative rather than an immediate concern. They acknowledge that their initial concerns about the cost of GenAI have lessened, but there are still some near-term risks to consider. The company recently increased its capital expenditure guidance and indicated a shift toward faster-depreciating technical infrastructure. Consequently, while the analysts perceive the cost and competitive risks as less severe, they caution that some degree of risk remains.

As a result of the downgrade, Alphabet shares have experienced a decline of over 1.5% in premarket trading on Monday.

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