Risk-reward on Google stock 'favorable' says Wolfe

Wolfe Research analysts said Thursday they see Google (NASDAQ:GOOGL ) shares’ risk-reward profile at current valuation as “favorable.”

These remarks come following GOOGL’s recent underperformance driven by rising concerns around the two Department of Justice (DoJ) cases, which analysts believe “is largely priced in.”

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

Among the potential remedies, the firm’s analysts see the most likely scenarios as 1) implementing choice screens and 2) Apple entering a distribution agreement with a competitor, likely Bing, which would become the default search engine.

They said their “incrementally positive view” on Google stock is grounded in four key factors:

Firstly, in the choice screen scenario, their base case analysis suggests a 10% upside to consensus earnings per share (EPS) estimates and a more than 35% increase in the current share price.

Secondly, even in a severe scenario where Apple switches its default search engine and Google loses 20% of its market share, the analysts project only a 5% downside to consensus EPS and around a 12% decline in share price.

Third, changes in Google’s Network business are expected to have little effect on core EPS.

Lastly, Wolfe points out that Q3 Search revenue may exceed expectations, despite fears of a modest miss.

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

"Google shares may not re-rate to 20x+ anytime soon because of DoJ overhang, but we believe the downside support is close to current levels and upside potential is much higher, especially if Google's Q3 print + Search revenue is better-than-feared," the analysts wrote.

Google shares rose around 12% this year, underperforming the broader market.

Source: Investing.com