1-Star Price
PREMIUM
5-Star Price
PREMIUM
Economic Moat
PREMIUM
Capital Allocation
PREMIUM
Wide-moat Alphabet and Facebook, both trading in 4-star territory, became more attractive after declining 2% and 4%, respectively, on fears of rising rates, deceleration in digital ad spending growth in the second half of this year, and possibly rotation into cyclical names. Our fair value estimates for Alphabet and Facebook remain at $2,925 and $390, respectively, representing a 27% upside for both from May 10 closing prices.
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.
