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Alphabet Inc Class C GOOG

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Alphabet's Q2 Beats Expectations; Cloud Partially Offsets Ad Revenue Decline; Raising FVE to $1,690

Ali Mogharabi Senior Equity Analyst

Analyst Note

| Ali Mogharabi |

Strong performances by Alphabet’s YouTube, cloud, and Google Play helped partially offset a decline in search ad revenue and resulted in second-quarter numbers above our expectations and the FactSet consensus. The firm has begun to see slight month-over-month improvement in search ad spending, although the business remains heavily dependent on an economic recovery. We continue to expect slight improvement in Google’s total ad revenue during the remainder of 2020 as the decline in search slows a bit and demand for direct-response ads continue to increase for YouTube. Google’s other segment is likely to continue to grow strongly this year, further diversifying Alphabet’s total revenue. Given the better-than-expected top- and bottom-line results in the second quarter and our assumption that Google will successfully monetize some of its other properties in the long run, we have increased our projections, resulting in a $1,690 fair value estimate, up from $1,520. This wide-moat and high-uncertainty name appears fairly valued, but we would not hesitate to accumulate shares during a pullback.

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Company Profile

Business Description

Alphabet is a holding company, with Google, the Internet media giant, as a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart homes products, which include Nest and Google Home, also contribute to other revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), faster Internet access to homes (Google Fiber), self-driving cars (Waymo), and more. Alphabet’s operating margin has been 25%-30%, with Google at 30% and other bets operating at a loss.

1600 Amphitheatre Parkway
Mountain View, CA, 94043
T +1 650 253-0000
Sector Communication Services
Industry Internet Content & Information
Most Recent Earnings Jun 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type Aggressive Growth
Employees 127,498