Is Alphabet (GOOGL) Worth Buying?

When investors consider whether to buy, sell, or hold a stock, they frequently look at analyst recommendations. Media coverage of these rating changes, which are provided by brokerage firm analysts, can influence a stock's price. But do these recommendations truly hold significant value?

Before diving into the reliability of these recommendations, let's examine what Wall Street analysts say about Alphabet (GOOGL - Free Report).

Currently, Alphabet has an average brokerage recommendation (ABR) of 1.40 on a scale from 1 to 5, ranging from Strong Buy to Strong Sell. This score is based on recommendations from 47 brokerage firms, indicating that approximately the consensus lies between a Strong Buy and a Buy.

Out of the 47 ratings contributing to the current ABR, an impressive 36 suggest Strong Buy, while three recommend Buy. This means that 76.6% of the recommendations are Strong Buy, and 6.4% are Buy.

Current Brokerage Trends for GOOGL

Check price targets and forecasts for Alphabet to gain further insights.

Despite the ABR suggesting a good time to buy Alphabet, relying solely on this metric for investment decisions may not be the best approach. Research has indicated that brokerage recommendations often do not effectively guide investors toward stocks with the highest potential for price appreciation.

So, why is this? Analysts from brokerage firms may exhibit a positive bias towards stocks they cover, mainly due to the vested interests of their employers. Studies show that for every Strong Sell recommendation, analysts tend to give out five Strong Buy recommendations.

This discrepancy implies analysts' interests may not align with those of retail investors, which can lead to misleading guidance regarding a stock's future price movements. Therefore, it is advisable to use brokerage recommendations as a supplementary tool to either confirm your own research or as an indicator that has historically paired well with successful predictive models.

One such model is the Zacks Rank, which categorizes stocks into five tiers, from #1 (Strong Buy) to #5 (Strong Sell). This tool leverages earnings estimate revisions and has shown a strong correlation with near-term stock performance. Hence, validating the ABR with the Zacks Rank may yield fruitful results in investment decisions.

Understanding ABR vs. Zacks Rank

It is crucial to differentiate between the ABR and the Zacks Rank, even though both are represented on a scale of 1 to 5.

The ABR relies solely on brokerage recommendations and may often include decimal points (e.g., 1.28). Conversely, the Zacks Rank embodies a quantitative model driven by earnings estimate revisions and is expressed in whole numbers.

There is a consistent trend of analysts being overly optimistic. The ratings they issue tend to favor positive outlooks even when research may not justify such ratings, leading to potential investor misguidance.

In contrast, the Zacks Rank is firmly rooted in earnings estimate trends, which empirical research has demonstrated correlate well with short-term stock price movements.

Another difference is in the timeliness of the data. While the ABR may lag in updating, the Zacks Rank promptly reflects changes in analysts' earnings estimates based on evolving business dynamics.

Is Investing in GOOGL a Wise Move?

Looking at the latest earnings estimate revisions for Alphabet, the Zacks Consensus Estimate has risen by 0.2% over the past month to reach $7.65.

The growing optimism among analysts regarding Alphabet's earnings potential is evidenced by a strong consensus in revising EPS estimates upwards, which could very well signal a promising surge in the stock's price in the near future.

Based on the overall movement in consensus estimates and four additional factors tied to earnings projections, Alphabet has been assigned a Zacks Rank #2 (Buy). For those interested, there is a complete list of today’s Zacks Rank #1 (Strong Buy) stocks available for review.

Thus, while the ABR recommending a buy for Alphabet serves as a valuable reference for investors, it should ideally be used in conjunction with detailed personal research and other analytical tools.

Alphabet, Investment, Analysts