After Earnings, is Alphabet Stock a Buy, Sell, or Hold?

The
stock
is
trading
just
below
our
fair
value
estimate.
We
believe
the
risks
are
well-balanced
here.
A
slowdown
in
ad
demand
over
the
second
half
of
2024
would
likely
hurt
the
stock,
as
would
any
indication
that
search
volume
growth
is
slowing.
Continued
acceleration
in
Google
Cloud
revenue
or
AI-related
revenue
generally
could
cause
the
shares
to
move
higher.

Key
Morningstar
Metrics
for
Alphabet

• Fair
Value
Estimate:
$182.00
• Morningstar
Rating: ★★★
• Morningstar
Economic
Moat
Rating:
Wide
• Morningstar
Uncertainty
Rating:
High

Fair
Value
Estimate
for
Alphabet

With
its
3-star
rating,
we
believe
Alphabet’s
stock
is
fairly
valued
compared
with
our
long-term
fair
value
estimate
of
$182
per
share,
which
implies
an
enterprise
value
of
about
13
times
our
estimated
2024
adjusted
EBITDA,
which
excludes
share-based
compensation.

We
expect
advertising
revenue
to
remain
over
70%
of
Alphabet’s
total
revenue,
driven
by
continuing
growth
in
digital
ad
spending,
albeit
at
a
much
slower
rate
than
historically.
We
model
6.5%
ad
revenue
growth
for
2024
due
to
slower
expected
economic
growth
than
in
2023.
We
have
estimated
total
Google
ad
revenue
of
$253
billion
in
2024
and
$272
billion
in
2025.
We
think
YouTube
will
contribute
13.6%
of
Google’s
advertising
revenue
in
2024,
up
slightly
from
2023,
and
more
than
14%
in
2025.
YouTube
growth
should
benefit
from
its
impressive
reach
and
usage
frequency,
plus
its
video-only
content
format,
which
is
attractive
to
brand
advertisers.

We
believe
Google
will
continue
to
gain
traction
in
the
cloud
market
and
assume
more
than
20%
annual
revenue
growth
through
2028.

Read
more
about
Alphabet’s
fair
value
estimate

Economic
Moat
Rating

We
assign
Alphabet
a
wide
moat,
thanks
to
durable
competitive
advantages
derived
from
the
company’s
intangible
assets,
as
well
as
its
network
effect.

We
believe
Alphabet
holds
significant
intangible
assets
related
to
overall
technological
expertise
in
search
algorithms
and
AI
(machine
learning
and
deep
learning),
as
well
as
access
to
and
accumulation
of
valuable
data
for
advertisers.
We
also
believe
Google’s
brand
is
a
significant
asset.
“Google
it”
has
become
synonymous
with
searching,
and
regardless
of
actual
technological
competency,
the
firm’s
search
engine
is
perceived
as
being
the
most
advanced
in
the
industry.
While
Microsoft’s
(MSFT) Bing
is
attempting
to
dethrone
Google
with
AI
technology
from
OpenAI,
we
think
the
firm
can
defend
its
dominance
in
search
with
its
own
AI
technology,
some
of
which
OpenAI’s
products
are
based
on.

Read
more
about
Alphabet’s
economic
moat

Financial
Strength

Alphabet
has
a
strong
balance
sheet,
with
cash
and
cash
equivalents
of
$111
billion
versus
total
debt
of
only
$13
billion
as
of
the
end
of
2023.
The
company
also
has
a
$4
billion
revolver
with
no
outstanding
balance.
Over
60%
of
the
company’s
cash
and
cash
equivalents
are
held
outside
the
US.

Read
more
about
financial
strength

Risk
and
Uncertainty

Our
Uncertainty
Rating
for
Alphabet
is
High.
While
we
remain
confident
that
Google
will
maintain
its
dominant
position
in
the
search
market,
a
long-lasting
downturn
in
online
ad
spending
could
harm
the
firm’s
revenue
and
cash
flow.
On
the
other
hand,
positive
returns
on
Alphabet’s
investments
in
cloud
and
moonshots
could
considerably
increase
our
fair
value
estimate.

Although
we
expect
intangible
assets
and
the

network
effect
will
help
Google
retain
its
position,
there
are
minimal
switching
costs
to
using
a
rival
search
engine.
We
think
this
risk
remains
manageable.
Bing –
the
nearest
competitor
and
the
first
mover
in
enhancing
search
with
generative
AI
capabilities –
currently
has
far
smaller
market
share
and
does
not
have
a
significant
presence
in
the
mobile
market,
where
Alphabet’s
Android
mobile
operating
system
gives
it
an
advantage.

The
firm’s
high
dependence
on
user
behaviour
data
represents
an
environmental,
social,
and
governance
risk.
If
it
fails
to
maintain
adequate
data
privacy
and
security,
Google’s
advertising
business
would
likely
suffer
and
user
trust
in
the
company’s
other
products
would
likely
falter.

Read
more
about
Alphabet’s
risk
and
uncertainty

Alphabet
Bulls
Say

As
the
number
of
online
users
and
usage
increase,
so
will
digital
ad
spending,
of
which
Google
will
remain
one
of
the
main
beneficiaries.

Android’s
dominant
global
market
share
of
smartphones
leaves
Google
well-positioned
to
continue
dominating
mobile
search.

The
significant
cash
generated
by
the
Google
search
business
allows
Alphabet
to
focus
on
innovation
and
long-term
growth
opportunities
in
new
areas.

Alphabet
Bears
Say

There
is
little
revenue
diversification
within
Alphabet,
as
it
remains
heavily
dependent
on
Google
and
search
advertising.

Alphabet
is
allocating
too
much
capital
toward
high-risk
bets,
which
face
a
very
low
probability
of
generating
returns.

Google’s
dominant
position
in
online
search
is
not
durable,
as
more
companies
and
regulatory
agencies
are
contesting
the
methods
through
which
the
company
has
been
extending
its
leadership.

This
article
was
compiled
by
Renee
Kaplan

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