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Alphabet is a widely recognised entity in the tech industry. Google, its most prominent subsidiary, stands out as the foremost internet-based service globally, functioning as a portal for users to access information.
Alphabet’s latest financial results came in strong, having posted better-than-expected earnings for 4Q23, with net income surging by 52% YoY. Despite this, markets were disappointed as the company reported ad revenue that missed estimates.
Google has a monopoly in online search with a 92% market share. Future integration of next-gen AI capabilities in its business would create more monetisation opportunities in time to come.
A major tailwind comes from Google Cloud which recently turned profitable. Google Cloud is gaining market share, and its growth is expected to further accelerate within the fast-growing cloud market.
Alphabet is also amongst the cheapest Big Tech stock, presenting an attractive investment opportunity. Based on a fair PE multiple of 22X, we have a 2026 target price of USD 194, implying an upside potential of 29% based on the last closing price of USD 150.77 on 22 March 2024.
Alphabet Inc (NASDAQ: GOOGL) is a widely recognised entity in the tech industry. Google, its most prominent subsidiary, stands out as the foremost internet-based service globally, functioning as a portal for users to access information. However, Google's influence extends beyond just search, encompassing many products such as Gmail, Google Maps, YouTube, and Google Cloud. Moreover, with the ever-expanding demand for generative artificial intelligence (AI) solutions, we think that Google is set to benefit over the longer term.
Company overview
Alphabet is essentially a collection of businesses — the largest of which is Google. Google is reported in two segments: Google Services and Google Cloud, while all non-Google businesses are collectively known as Other Bets.
Figure 1: Alphabet segment breakdown
by revenue
Google Services: Google Services (88.7%) accounts for the largest segment with revenue coming from Google Advertising as well as Google Other.
- Google Advertising revenues are comprised of Google Search (57.0% of overall revenue), YouTube ads (10.2% of overall revenue), and Google Network (10.3% of overall revenue).
- Google Other revenues are comprised of the Google Play, hardware sales of Fitbit wearable
devices and Google Nest home products, and YouTube non-advertising which
includes YouTube Premium and YouTube TV subscription services (11.2% of overall
revenue).
Google Cloud: Google Cloud (10.8%) offers cloud computing services to businesses, providing them with storage, processing power, and other tools to run their operations.
Other Bets: "Other Bets" (0.5%) segment comprises Alphabet's experimental ventures and projects beyond Google’s core business. These include businesses such as Waymo (self-driving cars), Verily (life sciences), and Wing (drone delivery). While these ventures are often in early stages and may not be profitable yet, they hold potential for future growth and revenue generation.
Overall, Alphabet's business model leverages its dominant position in online advertising to generate significant revenue while also investing in future opportunities via its diverse portfolio of businesses.
Alphabet’s strong financial results showcase its continued growth
Alphabet delivered strong results to end the fiscal year 2023, with both revenue and earning numbers beating estimates. The company’s revenues grew by 13.5% year-on-year (YoY) in 4Q23 to USD 86.1 billion (vs estimates of USD 85.3 billion). Net income also saw a significant jump of 51.8% YoY to USD 20.7 billion. Alphabet reported a 56.2% YoY increase in earnings per share, which came in at USD 1.64 (vs estimates of USD 1.59).
Table 1: Financial highlights of Alphabet
|
Alphabet (in USD millions) |
4Q23 |
4Q22 |
% Change |
FY23 |
FY22 |
% Change |
|
Sales and revenues
|
86,310 |
76,048 |
13.5% |
307,394 |
282,836 |
8.7% |
|
Operating Profit
|
23,697 |
18,160 |
30.5% |
84,293 |
74,842 |
12.6% |
|
Net Income
|
20,687 |
13,624 |
51.8% |
73,795 |
59,972 |
23.0% |
|
Earnings per share
|
1.64 |
1.05 |
56.2% |
5.80 |
4.56 |
27.2% |
|
Source: Bloomberg Finance L.P., Alphabet Data as of 31 Dec 2023 |
||||||
Figure 2: Revenue
growth YoY for Google Advertising and Google Other 
A monopoly in online search, with added AI capabilities to further enhance it
Google has a monopoly in online search, with a 92% market share. This strong monopoly in turn allows the company to reap the benefits of network effects, creating a virtuous cycle where increasing user searches creates more data, allowing Google to improve its algorithms to deliver better search results, thereby leading to even more users in the future.
While AI has been a hot topic since the launch of ChatGPT in late 2022, it is technically not new with Google being involved in various AI initiatives over the years (Table 2). Way back in 2011, Google Brain was established to provide early AI research, focused on deep learning and neural networks. Subsequently in 2014, Google was the first big tech company to make an AI start-up acquisition when they acquired DeepMind for more than half a billion. DeepMind has been performing futuristic work, such as teaching computer systems to beat top-ranked players of the Chinese board game Go.
Table 2: Timeline of some of the AI initiatives over the years
|
Initiative |
Description |
Year |
|
Google Brain |
Early AI research project at Google, focused on deep learning and neural networks |
2011 |
|
DeepMind (acquired) |
AI company acquired by Google, known for achievements in deep learning and reinforcement learning. |
2014 |
|
TensorFlow |
Open-source machine learning platform developed by the Google Brain team, widely used in many internal Google products such as Search, Gmail, Maps, Android, Photos, YouTube. |
2015 |
|
Google Assistant |
Launched Google Assistant, an AI-powered virtual assistant allowing natural language interaction with devices. |
2016 |
|
Waymo |
Waymo launched a self-driving car service, applying AI for real-world autonomous navigation. |
2018 |
|
LaMDA |
Unveiled LaMDA language model, demonstrating progress in generating human-quality text. |
2021 |
|
Gemini |
Introduced Bard, now known as Gemini, which they consider their most capable and general model ever built. Paid versions of Gemini are available. |
2023 |
|
Source: Google Blog, iFAST Compilations Data as of Sep 2023 |
||
With many AI initiatives developed over the years, Google has long made use of AI algorithms to improve search results and personalise user experience. Having large amounts of data coming from their search engine dominance also enables their Al algorithms to be trained on very diverse data sets, and further integration of these AI tools overtime would continue to enhance Google’s dominance.
For instance, one example of how Google is making use of AI, is to help its users shop. This new shopping experience is built on Google’s Shopping Graph, which has more than 35 billion product listings, making it the world’s most comprehensive dataset of constantly-changing products, sellers, brands, reviews and inventory. Users are able to get a snapshot of noteworthy factors to consider and products that fit the bill in order to make complex purchasing decisions easier (Figure 3).
Figure 3: Helping one shop with generative AI via Google’s Shopping
Graph 
Moreover, in December last year, Google launched a new large language model (LLM) called Gemini. Gemini is its very own answer to ChatGPT, and is designed to work across various Google products. Currently, Gemini comes in three different versions: Ultra, Pro, and Nano, each suited for different purposes (Figure 4).
Figure 4: Gemini is a family of multimodal large language models
Google is now offering access to Gemini Advanced (taps on some of the capabilities of Gemini Ultra) for USD 20 a month. In doing so, Google was following the precedent set by OpenAI, which sells access to its GPT-4 powered chatbot for USD 20 a month.
We expect generative AI to unlock more monetisation opportunities in time to come, such as by paving the way for improved ad pricing via the ability to enhance ad targeting and boost conversion rates. While still in the very early stages, subscription revenues coming from the use of its Gemini models is also something to look out, especially as these technologies and their applications evolve.
Google Cloud set to grow rapidly amidst a fast-growing cloud market
As mentioned above, the fastest growing segment in FY23 within Google is that of Google Cloud, helped by an increasing contribution from AI. The segment generated a total revenue of USD 33.1 billion in FY23 (Figure 5), growing by an impressive compound annual growth rate (CAGR) of 42% since FY17.
Figure 5: Google Cloud revenues from 2017 to 2023 
Figure 6: Google Cloud operating income and margins
More importantly, we note that Google Cloud has turned profitable in FY23. In the latest quarter, it generated operating margins of 9.4%, which is a massive improvement as its operating income swung from a loss of USD 480 million in 4Q22, to USD 864 million in 4Q23 (Figure 6). With its fast-growing cloud business, Google Cloud continues to steal market share from the smaller cloud providers, increasing its market share from 8% in 2019 to 11% in 2023 (Figure 7).
Figure 7: Google Cloud’s market
share has been steadily increasing
Moreover, in the current digital age, the demand for cloud computing remains on the path of secular growth. Cloud services offer numerous advantages over traditional on-premises infrastructure, including superior scalability, resilience, and cost management. This is a rapidly growing segment as enterprise spending on cloud infrastructure services grew 20% YoY in the fourth quarter according to Synergy Research Group.
Over the longer-term, the global cloud infrastructure market is expected to further grow from USD 233.9 billion in 2023 to around USD 653.9 billion by 2032, expanding at a CAGR of 12.1%. There is clear evidence that generative AI technology and services are driving demand higher, with many AI tools requiring vast amounts of datasets. With this in mind, we are positive on the growth trajectory for Google Cloud moving ahead.
Key investment risks
Challenges with Gemini: Alphabet has come under fire for slow product rollouts compared to its peers, particularly following the launch of Open AI’s ChatGPT. Gemini’s image generation also drew criticism over inaccurate historical depictions of race. All these recent hiccups in Gemini have put the spotlight on Google’s execution, leadership, and culture. While Alphabet is working to address the problems, we are wary that further issues with Gemini may fuel the perception that it is unreliable, and create an opening for competitors.
However, we think that Alphabet will likely be able to fix the shortcomings in its Gemini model output which is related to image generation, given the iterative nature of training large language models and adding guardrails using human feedback.
Regulatory scrutiny: Alphabet is subject to numerous US and foreign laws and regulations covering a wide variety of subjects, and introducing new products and services would further subject them to additional laws and regulations overtime.
For instance, the company has been fined a record €4.1 billion by the EU for antitrust in September 2022, with the EU claiming that they are using its dominance in search to throttle or deprioritise specific results or embellish features that push down rival results. More recently in December 2023, Google has agreed to pay USD 700 million, and to allow for greater competition in its Play app store based on the terms of an antitrust settlement with US states and consumers.
Don’t miss the opportunity to invest in Alphabet
All
in all, the rapidly expanding demand for generative-AI bodes well for not just
its search business, but also its fast-growing cloud business. Furthermore, we note
that amongst the Big Tech companies, Alphabet is also trading at the cheapest
multiples (Table 3), creating an attractive investment opportunity.
Table 3: Alphabet is trading at the cheapest multiples
|
Company |
Current Forward PE |
Historical Average Forward PE* |
Premium/Discount |
|
Alphabet |
20.41 |
22.12 |
-8% |
|
Microsoft |
35.02 |
25.65 |
+37% |
|
Meta Platforms |
24.24 |
26.60 |
-9% |
|
Apple |
25.67 |
20.11 |
+28% |
|
Nvidia |
38.03 |
35.97 |
+6% |
|
*10-Year historical average forward PE. Amazon has been excluded as they have not been consistently profitable over the past 10 years. Amazon current forward PE: 34.38 Source: Bloomberg Finance, iFAST Compilations Data as of 22 March 2024 |
|||
Figure 8: Alphabet is trading at
attractive valuations
Table 4: Alphabet’s earnings
|
Alphabet |
FY23A |
FY24E |
FY25E |
FY26E |
|
PE Ratio (X) |
22.8 |
21.4 |
18.8 |
17.1 |
|
Earnings Growth |
27.2% |
21.8% |
13.4% |
10.0% |
|
EPS (in USD) |
5.80 |
7.06 |
8.00 |
8.80 |
|
Upside Potential |
- |
2.8% |
17.0% |
28.7% |
|
Source: Bloomberg Finance L.P., iFAST Compilations Data as of 22 March 2024 |
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Figure 9: In the long-run, share
prices are driven by earnings
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