Date: October 10, 2024
Broker Name: OCBC Investment Research (OIR)
Company Overview
Alphabet Inc. operates through segments that include Google Services, Google Cloud, and Other Bets. The Google Services segment offers a wide range of products and services, including advertisements, Android, Chrome, devices, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. The Google Cloud segment includes the Google Cloud Platform (GCP), Google Workspace, and other enterprise services, with solutions focused on cybersecurity, databases, analytics, and AI offerings. The Other Bets segment mainly focuses on healthcare and internet services.
Investment Thesis
Alphabet dominates the global search market, with Google capturing over 90% of the global market share and 80% in the US. The company is expected to maintain its leadership position in search, while continuing to innovate in artificial intelligence (AI), particularly in the cloud segment. Alphabet’s ongoing initiatives in Generative AI (GenAI) and AI infrastructure through platforms like Vertex AI and Duet AI position the company for future growth.
Legal Headwinds
Alphabet faces legal challenges, particularly from the US Department of Justice (DOJ), which has proposed multiple remedies for Google’s dominance in the search market. Potential remedies could include sharing Google’s indexes, data, feeds, and models, and even a potential spinoff of key products such as Chrome, Play, and Android. Limits on default agreements and restrictions on revenue-sharing related to search are also possible outcomes. The DOJ’s final proposal is expected by March 2025, followed by a court ruling in late summer of 2025. However, the company argues that some of the proposed remedies, such as splitting off Chrome or Android, would be impractical.
Financial Performance
For FY2023, Alphabet reported revenue of USD 307.4 billion, with operating profit at USD 84.3 billion and net income at USD 73.8 billion. The company’s return on equity (ROE) reached 27.4%, and return on invested capital (ROIC) stood at 39.0%. The projected financials for FY2024 and FY2025 show continued growth, with expected revenues of USD 346.8 billion and USD 388.2 billion, respectively. Operating profit is anticipated to rise to USD 107.5 billion in FY2024 and USD 122.3 billion in FY2025.
ESG Updates
Alphabet’s ESG rating remained unchanged as of July 2024. While the company is exposed to potential data privacy-related risks due to its collection of end-user data, it follows industry best practices, including regular external audits of its IT security systems. However, Alphabet continues to face regulatory scrutiny in regions such as Europe and the US for alleged lapses in data security practices. On the positive side, the company is a leader in clean technology and has a strong initiative to reduce carbon emissions compared to its peers.
Key Risks
Several risks could impact Alphabet’s future performance. These include larger-than-expected capital expenditures, competitive pressures from AI developments, uncertainties in the macroeconomic environment, and ongoing regulatory issues.
Valuation and Forecasts
As of October 2024, Alphabet’s stock closed at USD 163.06, with a fair value estimate of USD 211.00. The stock’s forward price-to-earnings (P/E) ratio for FY2024 is 21.3x, decreasing to 18.7x for FY2025. Alphabet’s valuation remains attractive due to its dominant market position, especially in search, cloud, and AI.
Potential Catalysts
- Further leveraging of AI in Search and Cloud to drive better-than-expected user engagement.
- Improved profit margins driven by cost discipline.
- Stronger-than-anticipated revenue growth from YouTube.
Conclusion
Alphabet faces ongoing legal challenges, but the company remains focused on its core strengths—search dominance, AI innovation, and growth in the cloud business. Investors are expected to shift their focus back to fundamentals as earnings season approaches, especially given a relatively healthy online advertising environment.
