Alphabet, Facebook Remain Attractive
The two have already been trading at what we view as unwarranted discounts compared with their peers.
Wide-moats Alphabet (GOOGL) (GOOG) and Facebook (FB), both trading in 4-star territory, became more attractive after declining 2% and 4%, respectively, on fears of rising rates, deceleration in digital ad spending growth in the second half of this year, and possibly rotation into cyclical names. Our fair value estimates for Alphabet and Facebook remain at $2,925 and $390, respectively; representing a 27% upside for both from May 10 closing prices.
In our view, the fears referenced above are disputable. While rising rates should pressure multiples, Alphabet and Facebook have already been trading at what we view as unwarranted discounts compared with their peers. In terms of a slowdown in ad revenue growth during the second half of 2021, that would be a short-term artifact of tougher comps resulting from the pandemic, and we have already accounted for that in our valuation model. We expect digital ad revenue growth will remain at strong double-digit rates for both firms for several years.
While the two firms also face fierce pressure from all sides of the political spectrum to limit data usage and further prioritize data privacy, we believe advertisers will continue to allocate a higher percentage of their ad budgets toward Google and Facebook due to both platforms’ very large user bases. We remain confident that both firms will benefit significantly from the economic recovery as ad spending picks up. For this reason, while indirectly, the two still can be viewed as recovery plays.
Both stocks face additional risks such as impact from a possible increase in the federal statutory tax rate, along with higher rates on global intangible low-taxed income, and possibly the elimination of the foreign-derived intangible income deduction. We think these items could pressure our fair value estimates for Alphabet and Facebook by 8%-11% and 6%-10%, respectively. Assuming such an impact, the upsides based on current trading levels are still above 15% for both.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.