Is Alphabet’s share price drop an opportunity?

Alphabet’s [GOOG] share price slipped over 4% last week ending on October 1, as the owner of Google challenged an EU fine over anti-monopolistic practices. While the legal wrangling is likely to have dragged on sentiment, the drop follows a broader downturn in the markets.

Since early September, Alphabet’s share price, along with rivals Microsoft [MFST] and Apple [AAPL] have been on a downward trend, reflecting the broader tech-heavy Nasdaq.

That downturn in sentiment continued last week after the Fed signalled that tapering could be on the cards sooner, rather than later, with the Nasdaq slipping over 3.3% last week, along with falls from Microsoft and Apple.

We look at the investment case for Alphabet and its share price after a week that saw it defend its Android strategy, and CitiGroup warns over the search giant's ad revenue.

Alphabet’s defends Android against $5bn fine

The antitrust body in the EU has fined Google’s Android operating system for monopolistic practices. As part of its Mobile Application Distribution Agreements (MADAs), Google was asking phone makers (OEMs) to only install the Google Search app and Chrome browser app on handsets in exchange for a license waiver on the Google PlayStore, which hosts a bulk of mobile apps around the world.

The search major defended its position during the week-long hearing on the matter as it sought to annul the European Commission’s hefty fine. It was not without putting pressure on Alphabet’s share price.

"This licensing model is what attracted OEMs to the Android platform, and what enabled those OEMs to offer a consistent and high-quality user experience at the lowest possible price," Google's lawyer Alfonso Lamadrid told the General Court, adding, "People use Google because they choose to, not because they're forced to."

“This licensing model is what attracted OEMs to the Android platform, and what enabled those OEMs to offer a consistent and high-quality user experience at the lowest possible price. People use Google because they choose to, not because they're forced to” - Google's lawyer Alfonso Lamadrid

On Wednesday, Google, which is led by Sundar Pichai (pictured above), argued that the policy wasn’t designed to prevent competition, but to seize market share from Apple. While on Thursday, Google’s lawyers described the fine as ‘staggering’ and that Google couldn’t have been aware that it was contravening EU law as there was no precedent for it.

European Commission lawyers argued that the deals in effect meant that “competitors would not achieve critical mass to challenge its dominance.”

A decision is expected next year in what is part of a broader trend of regulators taking a tougher line on internet giants.

CitiGroup’s warning on Alphabet

While Google’s Android business comes under pressure in Europe, its advertising operations - which make up the bulk of revenue – is also getting called into question.

Google’s parent Alphabet saw its longest monthly sequential growth in a decade, Bloomberg reported in August. Advertising revenue for the company has surged, translating into higher margins and returns than any of its peers.

However, CitiGroup analyst Jason Bazinet warned that Wall Street was ‘just too bullish’ on the strength of advertising revenue when it comes to internet stocks last week. The analyst warned investors to stay away from names like Alphabet and Facebook as estimates could be too high. Instead, investors should consider Amazon, which has been a relative underperformer in this area.

For Bazinet, the growth has more to do with second-quarter results seeing a bounce back from the same time last year, rather than businesses entering some kind of “new era of higher ad intensity for every dollar of economic activity.”

“We think investors would be far better served to buy Amazon, -0.11% where we’re just a few quarters away from locking those difficult comps, and the stock has sort of underperformed because of those difficult e-commerce comps” - CitiGroup analyst Jason Bazinet

“We think investors would be far better served to buy Amazon [AMZN], -0.11% where we’re just a few quarters away from locking those difficult comps, and the stock has sort of underperformed because of those difficult e-commerce comps,” says the analyst.

The panel on the September 30 edition of CNBC’s Fast Money seemed unconvinced. Host Melissa Lee notes that what makes the Citi call interesting is that it suggests moving towards what are considered value plays in the space, towards stocks with a higher valuation. Pundit Guy Adami was more direct, saying “you flee from Google at your own peril. I understand that the stock has sold off recently, but in terms of a business model, it’s hard to argue against it.”

Earlier in September, Jefferies issued a similar sentiment, reiterating its ‘hold’ rating on the stock, but upping its price target to $3,325 from $3,150 - a 22% upside on Friday’s close. Among the analysts tracking Alphabet’s share price on Yahoo Finance, the stock carries a $3,106.11 price target - hitting this would see a 13% upside on Friday’s close.