Analysts Favor Google Shares

Wolfe Research analysts stated on Thursday that they find Google (NASDAQ: GOOGL) shares’ risk-reward profile favorable at current valuations.

This assessment follows GOOGL’s recent underperformance, fueled by rising concerns about two Department of Justice (DoJ) cases, which analysts believe are largely priced in.

Wolfe recently provided its outlook on potential outcomes after the recent antitrust ruling in a note published in early August.

Potential Outcomes

Among the possible remedies, the firm is considering two likely scenarios: 1) the implementation of choice screens and 2) Apple potentially entering a distribution agreement with a competitor, likely Bing, making it the default search engine.

The analysts have maintained an “incrementally positive view” on Google stock based on four key factors:

1. In the choice screen scenario, their base case analysis indicates a 10% upside to consensus earnings per share (EPS) estimates and over a 35% increase in the current share price.
2. Even in a worst-case scenario where Apple switches its default search engine and Google loses 20% of its market share, they project only a 5% downside to consensus EPS and approximately a 12% decrease in share price.
3. Anticipated changes in Google’s Network business are expected to have minimal impact on core EPS.
4. Wolfe mentions that Q3 Search revenue might exceed expectations, despite concerns of a slight miss.

Current Valuation Comparisons

The investment firm observes that Google shares currently trade at 18x EPS, compared to Meta (NASDAQ: META) at over 20x and the S&P 500 at 21x.

While they don’t expect Google shares to re-rate to 20x+ soon due to the DoJ overhang, they believe the downside support is near current levels, with significantly higher upside potential, particularly if Google’s Q3 report and Search revenue performance surpass expectations.

Google shares have increased approximately 12% this year, though they have lagged behind the broader market.