Alphabet Gaining Traction in the Cloud
We are raising our fair value estimate to $1,200 and view shares fairly valued today.
Alphabet (GOOG) reported better-than-expected fourth-quarter revenue and appears to be kicking off 2018 on a bright note, as the firm indicated that its cloud business is generating nearly $1 billion in revenue per quarter. At this rate, the potential $4 billion in Google cloud revenue in 2018 would exceed our expectation.
Growth in search and YouTube helped Google's advertising business following another strong quarter. The network effect and data (intangible asset) economic moat sources continue to drive growth in the size and overall usage of Google's ecosystem. The firm did miss our expectations and consensus on the bottom line, as traffic acquisition costs continued to grow. Management expects such costs to stabilize a bit this year. We increased our revenue growth projections for Alphabet, as we see continuing growth in its digital ad business and increased contribution from the Google Cloud Platform. All of this is partially offset by our lower operating margin assumption going forward. After assuming a slightly lower effective tax rate and rolling our model forward, we now value Alphabet at $1200 per share, up from $1100.
While Alphabet's mixed fourth-quarter results have pushed the shares down a bit in afterhours trading, we believe the stock remains fairly valued. Based on our valuation, a more attractive entry point for this name would likely be within the $950-$1,000 range.
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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.