INVESTMENT COMPANY BERNSTEIN DOWNGRADES ALPHABET AND ALIBABA

Bernstein says it's time to move to the sidelines as competition grows.

The firm on Monday downgraded the tech giant to Market Perform from Outperform with a target price of $125 per share - representing or roughly 6% growth over the next year.

The rise of artificial intelligence has helped Alphabet lift the stock more than 31% since January. But the downgrade by Bernstein follows a similar move by UBS, which cited similar concerns a day earlier.

"While the headlines are focused on AI, we see increasing competition from retail media, a share shift back to Meta, and yes, some pressure from Gen AI limiting near-term search growth," wrote analyst Mark Shmulik.

Shmulik added that he thinks Alphabet $GOOGL may be pushing too hard to merge generative AI with its core search business. "Google's aggressive push to integrate generic AI into core search results could create a short-term air pocket on search advertising prices," he noted.

Another issue that could limit Alphabet's profits is its valuation, the analyst said.

"For many investors (and sellers), Google stock resembles a warm embrace," Shmulik said. "Yet, once in a while, Google shares appear fairly valued, just as they are today, with a balanced risk-reward ratio and a narrative that has quickly caught up with fundamentals, which has seen Google shares rise +40% from November lows. It's time to move to the sidelines."

Bernstein downgrades Alibaba over concerns of "sustained low growth"

According to Bernstein, Alibaba $BABA 's low growth may be a longer-term headwind than previously thought.

The firm downgraded Alibaba shares to Market Perform from Outperform on Tuesday. It also cut its price target to $98 per share from $130. Bernstein's new forecast implies a nearly 15% increase from Monday's closing price of $85.47.

"We raised Alibaba a year ago on the basis that the stock was discounting perpetually low growth and that reopening would help support growth through a better category mix. Since then, Alibaba shares have traded in a range - but while they remain cheaply valued, the perpetually low growth no longer acts as an aggressive bear case," said analyst Robin Zhu.

Zhu added that Alibaba faces other challenges beyond low user engagement, and pointed to higher search costs stemming from merchant crowding, which is hitting merchants' return on investment.

"Alibaba's decision to spend on user time and engagement raises questions about monetisation and generating core FCF [free cash flow]," Zhu said.

Meanwhile, Zhu noted that while Alibaba's stock remains relatively cheap, which supported the company's upgrade last year, increased competition may be too strong a force to counter with efforts such as share buybacks and increasing earnings per share.

"Alibaba's stock remains moderately valued and its buybacks meant that the number of shares at the end of FY23 was down 2.4% year-on-year," he said. "However, the future is long in coming and we are not convinced that low multiples and modest earnings per share accretion can deliver sustained share price performance if the competitive problem in the e-commerce mainstream remains unresolved."