Analyst Bullish on Alphabet Spin-Off Potential

The brokerage firm believes not spinning off any of its businesses could hurt Alphabet

Mar 5, 2019 at 9:25 AM
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Speculation has grown in recent years about whether regulators will try to break up the large tech companies. Brokerage firm Needham is suggesting that such a move could actually unlock value for Alphabet Inc (NASDAQ:GOOGL). Specifically, an analyst note from Needham said that looking at GOOGL from a sum-of-its-parts viewpoint shows the stock is substantially undervalued, leading it to initiate coverage with a "buy" rating and $1,350 price target.

Needham also estimated Google-owned YouTube to be worth about $140 billion, based on how Netflix (NFLX) is valued. The firm cited GOOGL's "network effect," which refers to the ability for every new user to create value for others already using the services, and said that spinning off some of the company's units would "unlock significant hidden value." The note also suggested Alphabet's biggest FAANG rival is Facebook (FB), and that the latter will have a competitive advantage if the former chooses not to spin off any of its businesses.

To be sure, Wall Street is already overwhelmingly bullish on the tech giant, given that just one of the 27 analysts in coverage have anything less than a "buy" endorsement. The average 12-month price target, meanwhile, is $1,346.35.

In the options pits, short-term speculators remain unusually put-skewed, based on the Schaeffer's put/call open interest ratio (SOIR) of 1.11, ranking in the 98th annual percentile. Overall, open interest levels are relatively low, with the 157,273 open contracts sitting just 5 percentage points from a 12-month low. Speculators may want to consider GOOGL, though, since its Schaeffer's Volatility Index (SVI) of 20% ranks in the 18th annual percentile -- hinting at muted premiums at the moment.

The stock yesterday settled at $1,153.42, its best closing price since early October. It touched an all-time high of $1,291.44 back in July, and is up 10.4% in 2019.

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