It may seem like a strange time to be wading into the more growth-oriented spaces in the market and Scotia Wealth Management’s Stan Wong is definitely not expecting investors to go in full-tilt, but if you are looking, one stock that should be on your radar is Google parent company Alphabet (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL), which still has a long growth runway in the online and mobile ad space, according to Wong.
“Alphabet or Google is a name that we do hold in our portfolio. Certainly, the stock has come down quite a bit in the last few months and in general we are underweight the technology space at about 15 per cent or less relative to the S&P 500 which is about 36 per cent,” said Wong, portfolio manager at Scotia Wealth Management, who spoke on BNN Bloomberg on Thursday.
“But I think long term we do like the Alphabet name given the fact that we’ll see more and more advertising switch over to the mobile side, which Google has a stranglehold on given the fact that Android is the dominant market shareholder in that space,” he said. “And we’ll see more and more advertising move from traditional means over to the digital means.”
It’s one week to Alphabet’s 20-for-1 stock split coming up on July 1, a move that won’t affect the online advertising giant’s fundamentals but will bring its share price down to perhaps a more attractive-looking price tag for some investors. Trading currently at about $2,230 per share and with a market cap of $1.468 trillion, GOOGL will head down to a little over $100 a pop, which to some retail investors may make it a more doable option for, say, your average five-figure portfolio.
The stock has come off quite a bit this year as the market continues with its rotation away from growth stocks towards more defensive places to hide in today’s uncertain economic times. But GOOGL is still up a lot when you look at a longer-term chart. Even the two-year view is phenomenal at a positive return of about 65 per cent, while the five-year return sits at 138 per cent.
For Wong, there are pros and cons to owning Alphabet, and the investor needs to be judicious in dipping into the stock.
“We are seeing a shift in leadership from technology over to other areas, so we want to be careful in terms of what we own in that space. And when I look at Google, you’re looking at a forward P/E of about 19x, which is pretty decent given the fact that we’re going to see about a 20 to 25 per cent growth rate. The only thing that concerns me is that on the price to sales ratio we’re still looking at about 5.5x,” Wong said.
“So, I think you want to be cautious with some of these names and sort of nibble in on some of these very great large cap technology names,” he said. “[But] the stock is down and has been down since about November, so you can start to nibble away at it but be careful in terms of your weighting.”
One topic which continues to concern investors in GOOGL is on anti-trust considerations, where regulators in the US and the European Union have for years now been taking swings at Alphabet over its dominance in online advertising. Last month, for example, the EU and the UK launched a second investigation into practices by Google and the other online ad king, Meta Platforms, over whether their roles in advertising distort competition.
In the case of Alphabet, the probe conducted by the UK’s Competition and Markets Authority (CMA) will assess Google’s practices in being the largest service provider not only in demand-side platforms where advertisers buy space but in ad exchanges where they provide the technology to facilitate bidding and, further, in providing the ad servers to manage a publisher’s inventory.
“We’re worried that Google may be using its position in ad tech to favour its own services to the detriment of its rivals, of its customers and ultimately of consumers,” said the CMA’s Chief Executive Andrea Coscelli in a press release. “This would be bad for the millions of people who enjoy access to a wealth of free information online every day.”
In its most recently reported quarter, Alphabet said it registered $54.661 billion in Google advertising revenue over its first quarter 2022, an aggregate of sales in Google Search, YouTube ads and Google Network. The number was up 22 per cent from the previous year’s first quarter.