Alphabet Earnings: Google Search Remains Resilient as AI Adoption Drives Cloud Sales

Key Morningstar Metrics for Alphabet

• Fair Value Estimate: $237
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Alphabet’s Earnings

Alphabet GOOG reported solid second-quarter earnings that included sales of $96 billion, up 14%, and operating margins of 32%, flat year over year. Google Cloud continued to increase its contributions to the top line, expanding by 32%, as AI-driven demand for cloud infrastructure remained solid.

Why it matters: Alphabet’s strong second-quarter results, along with management commentary on solid artificial intelligence adoption and usage further strengthen our confidence in the firm’s competitive positioning in AI and the resilience of its core Search business.

• We like the integration of AI features (AI Overviews and AI Mode) within Google Search and view these additions as important in maintaining Google Search’s relevance, especially with younger users, while opening up new generative AI monetization vectors for the firm.
• Google Search’s 12% year-over-year growth, accelerating from 10% growth last quarter, further reflects Google Search’s resilience in the face of both gen AI-infused competitors as well as a tough macro, with spending on Search coming in well ahead of our prior 8% growth estimate.

The bottom line: We maintain our $237 fair value estimate for wide-moat Alphabet. We attribute the muted after-hours stock price reaction to the updated capital expenditure guidance, with the firm now expecting $85 billion in capital expenditures, up from $75 billion previously guided to.

• We view these investments as necessary and capable of producing strong returns. We see Alphabet’s full-stack AI strategy, with investments across hardware, cloud, and applications as well set up to both reduce costs and catalyze gen AI sales over time.
• We continue to view Alphabet as undervalued and trading in 4-star territory. We expect that as AI adoption and monetization remain strong and Google Search’s resilience surprises investors to the upside, the market’s view on the name will converge with our bullish stance.