Macroeconomic Headwinds Keep Pressure on Alphabet’s Advertising; Cloud Remains Bright Spot; $154 FVE

We are reducing our fair value estimate for Alphabet to $154 (from $160) as the firm’s fourth-quarter results displayed the impact of the macroeconomic environment on its ad business, which represents nearly 80% of total revenue. However, we are also pleased with continuing strong growth in the subscription and cloud businesses. With less uncertainty about the economy and an increasing focus on cost efficiency, we expect ad revenue growth to return in the second half of this year, followed by margin expansion in 2024. We expect further investments in artificial-intelligence-based products, thereby limiting margin expansion over the next five years. In the meantime, we welcome the firm’s continuing share repurchase as the stock still trades at a significant discount to our fair value estimate.