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Ahead of earnings from Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) next week, Jefferies sees some parallels with the global financial crisis of 15 years ago in seeing an attractive risk/reward setup for the stock.
The firm is staying “tactically cautious” in the near term, with macroeconomic headwinds swirling.
But “for investors looking past the looming recession,” GOOGL is trading well below its historical average on next-12-months enterprise value-to-EBITDA, analyst Brent Thill notes: about a 10x multiple vs. a 15-year average of 12x, and “not far from the 7x trough hit in ’08 and’12.”
In that 2008-2009 Global Financial Crisis, GOOGL stock bottomed three months before the S&P 500 did, and two full quarters before revenue growth bottomed out in 2009, he noted.
Meanwhile, the company’s core advertising business is well set up for such a macro event, he said. “Search-based advertising, which is low-funnel and provides visibility, certainty, and high [return on investment], tends to fare better than overall ad budgets in a macro storm.”
And there are several possible positive catalysts despite the worrying, he said – pointing to progressively easing comparisons quarter by quarter, the potential for more cost-cutting measures, share buybacks that could go beyond 100% of free cash flow, and “odd years are usually kind to GOOGL stock” (up 56% in odd years vs. down 5.8% in even years).
He has a Buy rating and $125 price target; with GOOGL up 2% Thursday, that implies a further 29% upside.
Seeking Alpha authors consider GOOGL a Buy, while Wall Street thinks it’s a Strong Buy, and Seeking Alpha’s Quant Ratings agree it adds up to a Strong Buy.
