Technically speaking, it’s a downgrade of sorts. Although Citigroup didn’t lower its “neutral” rating on Alphabet Inc (GOOG, GOOGL), the research arm of the bank did lower its suggested justifiable value for GOOGL stock (and presumably, GOOG too).

[ad#Google Adsense 336×280-IA]Its target price was bumped down from $924 per share to $900.

Yet, with GOOGL stock currently trading around $760, the difference between a 22% upside and an 18% upside seems more than a little irrelevant.

Why would Citigroup even bother?

Answer: As is so often the case with high-profile stocks, this new target price has less to do with Alphabet and more to do with Citigroup using GOOGL shares as a platform to make a much bigger philosophical point to investors.

In other words, don’t sweat the lowered target, and instead consider the meaning behind it.

It’s Really Not About Alphabet

First and foremost, don’t sweat the retracted target. Though Citigroup is still “neutral” on Alphabet, it also clearly thinks the stock is worth more than its current price, and the new target is only 2.6% lower than the prior target. It’s not a dramatic shift in the bank’s stance.

All the same, what gives?

Realistically, the lowered target puts Citigroup on the map as a champion of research outfits that’s given ample warning to all investors about the lurking, off-the-radar dangers of stock-based compensation.

A closer look at Friday’s new target reveals that Citigroup similarly lowered its target price on all four FANG stocks — Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX), and the company formerly known as Google, Alphabet — on Friday, each for the exact same reason. That is, Citigroup increasingly sees stock-based compensation packages as being a nagging drag on the bottom line.

It’s not exactly a new idea. Twitter Inc (TWTR) was recently singled out by Sanford C. Bernstein as one of the worst offenders when it comes to the use of shares — a directly dilutive practice — as a means of paying its employees. Bernstein noted, however, that a quiet increase in stock-based pay was slowly but surely widening the difference between operating earnings and GAAP earnings for several tech companies … including companies like Facebook and LinkedIn Corp (LNKD).

Citigroup is simply underscoring the notion, throwing its hat in a ring already occupied by a few other analytical firms that believe the practice has become significant enough to merit mention.

Citigroup analyst explicitly said:

“We are adjusting our models and price targets to better reflect the impact of stock-based compensation (SBC). Some may say this is a bear market issue, but we believe it is a necessary change that is long overdue…

“…Unlike some people, we do not think stock-based compensation should be treated as a cash expense, mostly because it is in fact not a cash item. Instead, we account for it consistent with what it is — an ongoing source of dilution to equity holders.”

Given the amount of attention the matter has gotten aside from Citigroup’s recent move, there’s likely something meaningful to it.

What Other Analysts Say About GOOGL Stock

For the record, though Citigroup thinks slightly less of GOOGL stock than it did just a few days ago, the big bank’s research arm is just one of 52 analytical firms currently keeping tabs on the company. The other 51 have had time to digest the same stock-based compensation headwind Citigroup now fears, and generally speaking, the group as a whole tends to be more prophetic than any one organization.

With that as the backdrop, investors can take solace in knowing that the average target price on GOOGL stock still stands at $926.27, and the average opinion on Alphabet shares is still a solid strong buy. The target price has been steadily rising since the middle of last year too, and GOOGL shares have continued to move higher, reaching for that ever-rising target price.

Moral of the story? Let’s not over-react to Citigroup’s new point of view. It’s less about Alphabet anyway, and serves more of a publicity purpose than as guidance for investors.

— James Brumley

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Source: Investor Place

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.