Alphabet Earnings: Another Strong Quarter Expected

Key Morningstar Metrics for Alphabet

• Fair Value Estimate: $220
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Expect From Alphabet’s Earnings

Alphabet GOOGL/GOOG reports fourth-quarter financial results on Feb. 4 after markets close. While advertising demand is expected to be solid, partly as the fourth quarter includes holiday-driven ad spending, investors are likely keeping a keen eye on how Google Cloud revenue shapes up.

Why it matters: We see fellow ad giant Meta’s strong fourth-quarter earnings, reported last week, as a good omen for Alphabet’s advertising sales. Beyond advertising, we also view Microsoft’s strong Azure growth for the fourth calendar quarter as a good read-through for Google Cloud demand.

• For the fourth quarter, we expect advertising sales to clock in at $70 billion, up 6% year over year, with YouTube the fastest-growing ad business at Alphabet. On advertising, we expect management to provide commentary on AI Overviews monetization and the impact on user engagement.
• On the cloud infrastructure side, we expect Google Cloud sales to top $12 billion, up 35% year over year. We continue to expect cloud revenue to be driven by artificial intelligence-related workloads and are expecting some directional commentary on Gemini’s (Alphabet’s large language model) monetization trends.

The bottom line: Going into earnings, we reiterate our $220 per share fair value estimate for wide-moat Alphabet and view shares as marginally undervalued. We believe outperformance on advertising, primarily via AI Overview monetization, and cloud growth could drive upside to our fair value.

• While investors have come around on the name, with Alphabet trading up 15% since the last earnings report, we continue to view the shares as attractively priced for investors seeking Big Tech exposure at a reasonable price.
• On the profitability side, we expect Alphabet’s fourth-quarter operating margin to come in at 32%, up 270 basis points year over year, driven mostly by an improving margin profile for Google Cloud. On expenses, we expect Alphabet’s capital expenditures for the quarter to be around $13 billion.