Alphabet, Facebook Remain Attractive

The two have already been trading at what we view as unwarranted discounts compared with their peers.  

Ali Mogharabi 11 May, 2021 | 10:54AM
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Wide-moats Alphabet (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 US$2,925 and US$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.

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Ali Mogharabi

Ali Mogharabi  Ali Mogharabi is a senior equity analyst for Morningstar.

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