Alphabet GOOG is set to release its first-quarter earnings report on April 24. Here’s Morningstar’s take on what to look for in Alphabet’s earnings and stock.
Key Morningstar Metrics for Alphabet
• Fair Value Estimate: $237.00
• Morningstar Rating: ★★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium
Alphabet Earnings Release Date
• Thursday, April 24, after the close of trading
What to Watch for in Alphabet’s Q1 Earnings
• We are expecting a strong quarter for Google Cloud, with the firm releasing more data/metrics showing strength in the platform.
• While advertising is expected to come under pressure due to macro, we aren’t expecting a major impact on the first quarter’s earnings.
• We think the firm will provide more color on GenAI monetization in search and elsewhere to allay investor concerns about the return on investment for these investments.
• We don’t expect any commentary on the antitrust cases, and maintain our view that there are a range of regulatory outcomes, and that Alphabet can navigate them without experiencing any material value destruction that isn’t priced in.
• From a valuation perspective, there is a ton of bad news (monetization challenges, search disruption, antitrust) baked in, with the stock trading in the mid-teens forward price/earnings, well below the market and its “Magnificent Seven” peers. We expect 2025 to be the turnaround year, with investors gradually coming in agreement with our thesis on antitrust, GenAI monetization, and the resilience of traditional search.
• Alphabet stock is materially undervalued, trading in the 5-star range.
Alphabet Stock Price
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Fair Value Estimate for Alphabet Stock
With its 5-star rating, we believe Alphabet’s stock is significantly undervalued compared with our long-term fair value estimate of $237 per share, which implies a 2025 adjusted price/earnings multiple of 26 times and an enterprise value/adjusted EBITDA multiple of 19 times. We forecast Alphabet’s top line to grow at an 10% compound annual growth rate over the next five years.
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 merits a wide economic moat rating owing to the intangible assets, network effect, cost advantage, and customer switching costs that permeate a variety of businesses that it owns.
While Alphabet’s own reporting operating segments are split up in Google Services, Google Cloud, and Other Bets, we believe that for the purposes of analyzing the firm’s economic moat and durable competitive advantage, a different split is more appropriate. In our moat analysis, we look at Google Search, YouTube, Google Cloud, Android and Google Play, Devices, and Other Bets (which includes 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 2024 with cash and cash equivalents of $96 billion, more than offsetting its debt balance of $11 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 on diversifying its cash generation, with Google Cloud 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. Our rating reflects our belief that despite the near-term uncertainty around antitrust regulation and potential competition in the AI-infused search market, Alphabet is well-positioned to expand its overall business while maintaining a rock-solid balance sheet.
As we look 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 Alphabet can leverage across nearly every business it operates, should be value-accretive. At the same time, however, we do think Google Search’s status as the runaway leader in search could come under pressure primarily due to the 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.
GOOG Bulls Say
• Alphabet’s core advertising business is deeply entrenched in advertising budgets, allowing the firm to benefit from a secular increase in digital advertising spending
• The firm’s advertising business generates substantial cash flows that it can reinvest in growth areas such as GCP, AI-infused search, and aspirational projects like Waymo.
• Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.
GOOG Bears Say
• While Alphabet is seeking to diversify its business away from search, text-based advertising remains the largest contributor to the firm’s top line creating a concentration risk.
• Alphabet’s continued investments in new, often unproven technologies, via its Other Bets business have been a drag on cash flows.
• Regulators around the world are keying in on Alphabet’s search dominance and could upend the search market through the imposition of deep, structural changes in the search space.
This article was compiled by Jacqueline Walker.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
