Company Reports

Alphabet delivered strong results during the first quarter, with revenue growth accelerating and restructuring efforts driving margin expansion. The firm also instituted a dividend, which will total about $10 billion annually at the initial rate, and authorized an additional $70 billion of share repurchases. While growth likely won’t maintain this quarter’s pace throughout this year, Alphabet’s results position it to exceed our expectations for the year. As with Meta, the firm is ramping up efforts to develop artificial intelligence technology, setting expectations that capital investment will continue at the current pace, implying full-year spending of nearly $50 billion versus about $32 billion each of the past two years. Alphabet is taking a tougher stance on costs than its AI rival, continuing to cut headcount and consolidating teams to blunt the impact of infrastructure investments on profitability.

Alphabet dominates the online search market with 90%-plus global share (80%-plus US share) for Google, and the business generates very strong cash flow. We expect continuing search growth as we remain confident that Google will maintain its leadership despite Microsoft's move to include generative artificial intelligence in Bing and Google's recent AI missteps. We also foresee YouTube and cloud contributing more to the firm’s top and bottom lines.

Alphabet dominates the online search market with 90%-plus global share (80%-plus US share) for Google, and the business generates very strong cash flow. We expect continuing search growth as we remain confident that Google will maintain its leadership despite Microsoft's move to include generative artificial intelligence in Bing and Google's recent AI missteps. We also foresee YouTube and cloud contributing more to the firm’s top and bottom lines.

Alphabet dominates the online search market with 90%-plus global share (80%-plus U.S. share) for Google, and the business generates very strong cash flow. We expect continuing search growth as we remain confident that Google will maintain its leadership despite Microsoft moving first to include generative artificial intelligence in Bing search. We also foresee YouTube and cloud contributing more to the firm’s top and bottom lines. Finally, we view investments in “moonshots” as attractive, with significant uncertainty but also substantial upside.

The network effect continued to drive growth at Google search and YouTube during Alphabet's fourth quarter. In addition, as we expected, increasing demand for artificial intelligence accelerated cloud revenue growth. However, continuing weakness in Google’s advertising technology business, or Google network, pressured total advertising growth a bit.

We are maintaining our $161 fair value estimate for Alphabet as we think the recently announced settlement of a case against Google will have only a minimal impact on the wide-moat firm.

While a jury on Dec. 11 decided against Google in the antitrust case brought by Epic Games, we are maintaining our $161 fair value estimate on parent company Alphabet. Alphabet will appeal the decision and, if it reaches the U.S. Supreme Court, we believe the firm's consumer welfare argument will likely be favored by the justices. We think the Supreme Court will consider that, in the long run, Google Play provides the biggest audience and best opportunity for developers to monetize their work on Android phones, for which Google should be compensated. Plus, while the firm may no longer be allowed to force Android phone manufacturers to default to its app store, we expect Android smartphones users will still favor Google's app store, as it likely provides a wider selection of apps.

We are maintaining our $161 fair value estimate on Alphabet, as we do not expect the latest events around OpenAI and Microsoft to significantly affect Google's artificial intelligence capabilities in the short or long term.

We continue to view the shares of wide-moat Alphabet as attractive. The network effect for Google’s core advertising business remains strong, and as we anticipated, hesitancy among advertisers is lessening, demonstrated by accelerating revenue growth in both search and YouTube. Cloud revenue growth aligned with our expectations but was slower than Microsoft’s Azure (23% versus 29%), which pulled Alphabet shares down in after-hours trading.

We maintain our $161 fair value estimate on wide-moat Alphabet and continue to view it as attractive. Growth in search and cloud, plus a turnaround in YouTube drove the firm’s impressive second-quarter revenue growth.

Alphabet dominates the online search market with 90%-plus global share (80%-plus U.S. share) for Google, via which it generates strong cash flow. We expect continuing search growth as we remain confident that Google will maintain its leadership despite Microsoft moving first to include generative artificial intelligence in Bing search. We also foresee YouTube and cloud contributing more to the firm’s top and bottom lines. Finally, we view investments in “moonshots” as attractive, with significant uncertainty but also substantial upside.

We are maintaining our $154 fair value estimate for Alphabet following first-quarter results. We were impressed by Google Search advertising revenue growth; continuing strength in the cloud business, which is making headway toward profitability, likely next year; consolidated margin expansion for the first time in three quarters; and the latest authorized share buyback. However, YouTube Shorts continues to pressure overall YouTube advertising revenue. Economic uncertainty pushed network ad revenue lower. Plus, increasing competition on the artificial intelligence side, whether in the cloud or the advertising segment, is forcing the firm to keep investing in enhancing computing capabilities. Nevertheless, we believe Alphabet has the necessary technology and talent to successfully battle AI competitors, especially on the search side.

We are maintaining our $154 fair value estimate on Alphabet. According to The New York Times, Samsung is considering changing the default search engine on its devices from Google to Microsoft’s Bing for the first time in 12 years. While Google is facing increasing competition and disruption in the online search market, mainly because of the emergence of artificial intelligence, we think it can maintain its network effect moat source. First, we have not seen indications of search market share loss since the release of OpenAI’s ChatGPT (November 2022) and Microsoft’s AI chat feature in Bing (February 2023). According to Statcounter, Google’s market share has not been affected through April. Plus, even before becoming the default search engine on Samsung devices 12 years ago, Google’s share was around 90% and has remained between 90% and 95%.

The Joe Biden administration is threatening to ban TikTok from the U.S. and talks about a possible sale of its U.S. operations to an American company have increased. At the same time, China may not approve a sale, as reported by The Information. In our view, the uncertainty surrounding the possible ban or sale of TikTok could benefit Snap, Meta’s Instagram, and Google’s YouTube. We are maintaining our $154, $260, and $16 fair value estimates for Alphabet, Meta, and Snap, respectively.

The collapse of Silicon Valley Bank has created doubt about access to capital for tech firms, but we do not expect any material impact on online media or advertising firms under our coverage and we are not adjusting our fair value estimates on these stocks. The chance of Silicon Valley Bank becoming a contagion did decline a bit as of March 12. While a second bank, Signature Bank, was closed, regulators announced that all deposits at both banks will be accessible beginning on March 13.

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.

Alphabet dominates the online search market with 80%-plus global share for Google, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in search. We foresee YouTube contributing more to the firm’s top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside.

Alphabet reported disappointing third-quarter results as revenue growth decelerated further, driven by the stronger dollar and economic uncertainty, which is increasing hesitancy in ad spending. Assuming less uncertainty in the macroeconomic environment, plus the monetization of YouTube Shorts, we expect advertising revenue growth to return to double-digit levels in 2023. Unlike advertising, the cloud business maintained impressive growth. After adjusting our model, including lower top-line growth assumptions, we slightly reduce our fair value estimate of Alphabet to $160 from $169. The stock is down nearly 7% in afterhours trading and remains attractive.

Alphabet dominates the online search market with 80%-plus global share for Google, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in search. We foresee YouTube contributing more to the firm’s top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside.

While Alphabet’s second-quarter results missed FactSet consensus estimates, we found the firm’s search advertising and cloud numbers encouraging. Google’s diversified advertising offerings appear to be partially offsetting uncertainties in the macro environment, while digital transformation to cloud remains on top of many businesses’ priority list. We have slightly lowered our short- and medium-term expectations given the ongoing economic and geopolitical challenges, resulting in a $169 fair value estimate for Alphabet, down from $180. While the firm is taking steps to control costs at least through this year, with a strong cash-generating advertising business, progress toward profitability within its cloud segment, and a strong balance sheet, we think Alphabet is well-positioned to allocate more capital toward tuck-in acquisitions and investments.