Wedbush Cuts Alphabet (GOOGL) to Underperform on Concerns About 'Four Horsemen' of Search Apocalypse
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(Updated - September 28, 2016 7:20 AM EDT)
Wedbush downgraded Alphabet (NASDAQ: GOOGL) from Neutral to Underperform with a price target of $700. Analyst James Dix raised concerns about the arrival what he calls the "four horsemen of the search Apocalypse." These include self-identified consumers, consumer control of IP-delivered ads, payments innovation, and attention markets.
Dix explained, "Despite favorable near-term trends in mobile search advertising monetization, YouTube advertising growth, and profitability as well as its visibility (reflecting the Alphabet reorganization last year), we see underappreciated risks to search advertising as substantial enough to support our rating. Specifically, we assume that search engine advertising economics will be less attractive than expected because of: 1) new forms of competition to search from non-search services, including those which may offer 'paid attention' features; and 2) continuing competition from vertical search/e-commerce platforms."
Discussing mobile search monetization, the analyst continued, "Paid search monetizes better than other digital media because its traffic is a good proxy for 'self-identified consumers.' GOOGL’s recent mobile search ad changes push the traffic mix to paid from organic, which has decelerated sharply. This creates potential disequilibrium in monetizing these consumers—as advertisers balance search ad cost shocks against ROI—and a smaller search moat vs. competitors. Despite shares this past year +29% vs. S&P500 +14%, and 91% of ratings now 'buy,' we sound alarm about what could release the spring."
Expanding on his 'four horsemen' comments, the analyst said, "Digitizing commerce and advertising is easing targeting of self-identified consumers and consumer control of IP-delivered ads, and thus user-priced attention gateways. To target the market of people in the market, conditioning “paid attention” on purchase could often substitute for search advertising. Payments innovations should facilitate more seamless settlement of incentives. Leveraging these trends, markets to price attention could supply more economic proxies for self-identified consumers, especially as data science better distinguishes among paths of switchers and loyalists. Attention markets could compete for marketing spending with search, other direct media (measured and unmeasured), and direct response uses of mass media, like addressable TV and performance display/video, pulling both B2B and B2C ad spending (Volvo has paid prospects for test drives)."
Shares of Alphabet closed at $802.65 yesterday.
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