Going Into Earnings, Is Alphabet Stock a Buy, a Sell, or Fairly Valued?

Alphabet /GOOG is set to release its fourth-quarter earnings report. Here’s Morningstar’s take on what to look for in Alphabet’s earnings and stock.

Key Morningstar Metrics for Alphabet

• Fair Value Estimate: $220.00
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

Earnings Release Date

• Tuesday, Feb. 4, 2025, after the close of trading

What to Watch for in Alphabet’s Q4 Earnings

• We will keep a keen eye on GenAI monetization (via AI overviews, Gemini adoption, and increased GCP spending). This is the topic du jour for investors, and Google Cloud’s performance will be crucial this quarter.
• As YouTube remains a key driver of Alphabet’s overall future growth trajectory, growth in ad sales and any subscription numbers the company provides will also be important.
• As most of the firm’s sales still come via advertising, it will be important to see how its ad business did, especially considering how strong Meta Platform’s META fourth-quarter numbers were on this front.
• From a valuation standpoint, we think investors have largely come around to our opinion on Alphabet. We had previously noted that the price dislocation between our fair value estimate and the market price was due to antitrust concerns and a perception that the company was an AI laggard. With shares up quite materially in the past few months, some of these concerns (particularly around AI) have largely been addressed.

Fair Value Estimate for Alphabet

With its 4-star rating, we believe Alphabet’s stock is undervalued compared to our long-term fair value estimate of $220 per share. We forecast Alphabet’s top line growing at a 10% compound annual growth rate over the next five years.

Drilling deeper into the firm’s various segments, we expect Google Search to grow at a mid-to-high-single-digit level over the next five years as the digital advertising market matures and growth rates taper off after a robust few years following the pandemic. We expect YouTube to grow at a low-double-digit rate over the next five years, with a strong advertising business being increasingly supported by a growing subscription business.

Read more about Alphabet’s fair value estimate.

Economic Moat Rating

We believe Alphabet has a wide moat, owing to the intangible assets, network effect, cost advantage, and customer switching costs that permeate its businesses. While Alphabet reports its operating segments as Google Services, Google Cloud, and Other Bets, we believe a different split is more appropriate to analyze its moat and competitive advantage. We look at Google Search, YouTube, Google Cloud, Android and Google Play, Devices, and Other Bets (which include Google’s aspirational projects, such as self-driving vehicles and internet access).

Read more about Alphabet’s economic moat.

Financial Strength

We view Alphabet’s financial position as virtually unassailable. The firm closed out 2023 with cash and cash equivalents of $111 billion, more than offsetting its debt balance of $13 billion. The firm’s advertising business is a cash-generating machine, churning out tens of billions of dollars in free cash flow annually. Alongside advertising, Alphabet is making progress toward diversifying its cash generation, with GCP and YouTube subscription sales as additional free cash flow drivers.

Read more about Alphabet’s financial strength.

Risk and Uncertainty

We assign Alphabet an Uncertainty Rating of Medium, reflecting our belief that despite the near-term uncertainty around antitrust regulation and potential competition in the AI-infused search market, the firm is well-positioned to expand its overall business while maintaining a rock-solid balance sheet. Looking ahead, we believe Google’s intangible assets and network effects will likely safeguard its dominance in the search space. Further, the firm’s continued investments in AI, which it can leverage across nearly every business it operates, should be value accretive. At the same time, we think Google Search’s status as the runaway leader in search could come under pressure, primarily due to antitrust scrutiny. While we don’t see the firm’s market leadership slipping due to antitrust concerns, this issue adds uncertainty to an otherwise stable business.

Read more about Alphabet’s risk and uncertainty.

GOOGL/GOOG Bulls Say

• Alphabet’s core advertising business is deeply entrenched in advertising budgets, letting the firm benefit from a secular increase in digital advertising spending
• The firm’s advertising business generates substantial cash flows it can reinvest in growth areas such as Google Cloud Platform, AI-infused search, and aspirational projects such as Waymo.
• Alphabet has a huge opportunity in the lucrative public cloud space since it’s a key cloud vendor for enterprises looking to digitize their workloads.

GOOGL/GOOG Bears Say

• While Alphabet seeks to diversify its business from search, text-based advertising remains the largest contributor to its top line, creating a concentration risk.
• Alphabet’s continued investments in new, often unproven technologies via its Other Bets business have dragged on cash flows.
• Regulators worldwide are keying in on Alphabet’s search dominance and could upend the market through deep structural changes.

This article was compiled by Aman Dagra.