Amazon or Google? It’s a choice many investor has made at various times.
Right now, Google parent Alphabet (Alphabet Stock Quote, Chart, News NASDAQ:GOOGL) is trying to make its way back to even for the year but if the COVID-19 pandemic keeps the economy in the dumps over the mid and long term, there are better options out there, says David Fingold of Dynamic Funds, who prefers Amazon (Amazon Stock Quote, Chart, News NASDAQ:AMZN) at the moment.
Like the rest of the market, all of the FAANG stocks got hit hard by the COVID-19 crisis which has dropped economic outlooks for 2020 by a substantial margin, but some are doing better than others.
The S&P 500 lost a full third of its value between February 21 and March 23 and has so far made up a little less than half of that ground, while the tech-heavy NASDAQ lost 27 per cent over the same period and has gained by a third of that.
Meanwhile, Microsoft is now down about ten per cent since the start of the downturn in February, Netflix is back pretty much to even and Amazon looks headed in the same direction.
But even with a nice rally over the past couple of days Alphabet is still down 19 per cent from its February 21 high, with many concerned about the company’s advertising-dependent revenue in the current climate.
While Alphabet has a number of irons in the fire such as its cloud computing products, its Pixel phones and still-early-stage investments such as Waymo and Verily, advertising is still the big draw, accounting for 83 per cent of the company’s revenue last year.
That’s a ominous number in the face of an economic slowdown, says Fingold, vice-president and senior portfolio manager at Dynamic, in conversation with BNN Bloomberg on Tuesday.
“We've moved to the sidelines on Google because their primary source of revenues is advertising and in every recession advertising revenues as a percentage of GDP have fallen,” Fingold said.
“I am keeping an open mind with respect to Google,” he said. “I understand that their share of advertising revenues goes up and that could be an offset to declining advertising spending as a percentage of GDP.”
“We already have exposure to advertising because we own Amazon and they have various sources of marketing communication revenue within their business,” Fingold said.
Alphabet gave investors a better glimpse at its structure in its latest earnings report in early February where for the first time it showed Cloud and YouTube revenues as separate segments. GOOGL’s fourth quarter saw revenue climb to $46.08 billion and earnings of $15.35 per share, whereas analysts had been expected a top line of $46.94 billion and EPS of $12.53 per share.
Fingold said the extent of the current downturn is very much up in the air, meaning that the point at which companies will again pick up their advertising spend remains an unknown.
“The fear would be that I’m getting into cute with this because it’s also entirely possible that if this is a sharp, short recession that ends in June or ends in September, that the market may already be looking towards an inflection in advertising revenues,” Fingold said.
“So [Alphabet] is a company that's on our watch list. I really like it. It could be on our recommended list it could be owned very easily, but we just feel that at this juncture we have better ideas,” he said.