We are raising our Fair Value Estimate for Mide-Moat Alphabet (GOOGL) to $209 (CAD $284.20) from $182 after taking a fresh look at the firm’s overall business and raising our growth expectations for its cloud computing arm.
We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has become a true technology behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals, including search, artificial intelligence, video, and cloud computing.
Alphabet’s core strategy is to preserve its strong advertising business, with most of its advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.
We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. By leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.
On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed on Google, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.
Key Morningstar Metrics For Alphabet Shares
• Morningstar Rating: ★★★★
• Morningstar Fair Value Estimate: $209
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
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