Going into Earnings, is Alphabet Stock a Buy, a Sell, or a Hold?

Capital
Spending
Plan
Updates

There
is
growing
concern
that
investments
in
data
centers
and
computing
power
at
Alphabet,
Meta
Platforms
(META),
Amazon
(AMZN),
and
Microsoft
(MSFT) will
fail
to
deliver
decent
financial
returns.
Beyond
that,
we
suspect
people
are
interested
in
how
Alphabet’s
plans
could
affect
Nvidia
(NVDA).

The
Status
of
the
Advertising
Market

Is
demand
for
digital
advertising
at
least
holding
steady?
Cost
per
click
in
the
search
business
was
up
8%
in
the
first
quarter
after
being
stagnant
or
down
for
18
months.
There
is
fear
that
demand
from
Asian
retailers
(like
Temu)
for
US
ads
will
wane
and
pull
pricing
lower.

Search
Volume

If
search
click
volumes
are
weak,
that
would
feed
the
narrative
that
new
AI
tools
from
OpenAI/Microsoft
and
others
are
chipping
away
at
Google’s
dominance.

Other
Issues 

What’s
the
thinking
behind
the
rumoured
Wiz
acquisition?
Are
there
any
developments
on
an
Apple
partnership
to
include
Google
AI
tools
in
the
next
iPhone?
Are
there
updates
on
any
of
the
lawsuits
Alphabet
is
facing?

Key
Morningstar
Metrics
for
Alphabet

• Fair
Value
Estimate:
$171.00
• Morningstar
Rating:
3
stars
• Morningstar
Economic
Moat
Rating:
Wide
• Morningstar
Uncertainty
Rating:
High

Fair
Value
Estimate
for
Alphabet

Our
Fair
Value
Estimate
is
$171
per
share,
equivalent
to
a
2024
enterprise
value/EBITDA
ratio
of
15.
We
expect
slight
margin
pressure
in
2024
given
the
firm’s
continued
investments
in
growth
initiatives,
mainly
in
AI,
which
require
higher
research
and
development.
We
look
for
margin
improvement
in
2025-28,
driven
by
better
generative
AI
search
monetisation
and
faster
growth
in
cloud,
thanks
to
wider
adoption
of
generative
AI.
Our
model
assumes
a
five-year
compound
annual
growth
rate
of
over
10%
for
total
revenue
and
a
five-year
average
operating
margin
of
nearly
29%.

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.

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
United
States.

Read
more
about
Alphabet’s
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.

Google
faces
antitrust
pressure
and
various
claims
and
investigations
from
different
regulatory
agencies
regarding
search
bias
and
its
overall
market
dominance
in
online
advertising.
Some
governments
may
forbid
access
to
some
of
Google’s
properties,
which
could
result
in
lower
user
growth
and
monetisation.
Similarly
to
Meta,
Google
faces
limitations
on
mergers
and
acquisitions
as
the
US
and
other
countries
attempt
to
lessen
the
firm’s
dominance
in
advertising
and
the
internet
market.

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
Krutang
Desai

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