Morningstar

Macroeconomic Headwinds Keep Pressure on Alphabet’s Advertising; Cloud Remains Bright Spot

Trimming fair value estimate on Alphabet stock to $154; shares undervalued.

The Google sign outside Alphabet Headquarters
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Alphabet Stock at a Glance

  • Current Morningstar Fair Value Estimate: $154
  • Hanesbrands Stock Star Rating: 4 stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Stable

Alphabet Q4 Earnings Update

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.

Alphabet Ad Revenue to Improve in Second Half

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.

During the quarter Google’s search business, which is a better fit for direct response campaigns, held up well while YouTube, which attracts more brand ads, was affected more, demonstrating the effect of the current environment on advertisers and how they prioritize their spending. We expect a more balanced approach and more spending by advertisers as the macroeconomic environment improves. We also expect monetization of YouTube short-form videos to contribute to the firm’s accelerating advertising growth.

Regarding AI and the emergence of OpenAI’s ChatGPT, we commend Google management’s quick and clear response, demonstrating that the firm has the AI technology prowess to launch AI-based features not only in search, but also within its ad technology stack and cloud offerings, including Workspace, as the emergence of AI competitors can disrupt search, overall digital advertising, and other areas.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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