Alphabet: We See the Equity Raise as a Further Vote of Confidence in AI Monetization and Returns

Key Morningstar Metrics for Alphabet

• Fair Value Estimate
  : USD 433.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

On June 1, Alphabet GOOG announced equity offerings totaling USD 80 billion. The offerings are split between USD 30 billion in public issuance, with USD 15 billion in convertible preferred stock, a USD 40 billion program to mostly fund employee equity taxes, and a USD 10 billion private placement to Berkshire Hathaway BRK.B.

Why it matters: Despite the USD 80 billion headline number, we believe the real number relevant to investors is USD 50 billion, with USD 30 billion of the At-The-Market program representing an administrative change in how Alphabet meets its employee equity grant-related tax obligations.

• That said, even a USD 50 billion capital raise to fund artificial intelligence ambitions is material, provided that the firm has already raised more than USD 85 billion in debt capital markets over the past year.
• We believe that these raises across the capital stack should be viewed as a clear signal from Alphabet that it plans to substantially increase its AI investments as it becomes more surefooted about the returns associated with these investments.

The bottom line: We maintain our USD 433 per share fair value estimate for wide-moat Alphabet and view the market’s reaction, sending shares down 4%, as an overreaction. We view shares as attractive for long-term buyers at current levels.

• While the headline number may suggest a 2% EPS dilution, we believe that once adjusted for the ATM tax mechanism as well as the capped calls that hedge the dilution risk associated with the convertible stock, investors should look at an effective dilution risk of less than 1%.
• Long-term investors should take some confidence in the fact that Berkshire, the quintessential long-term investor, sees upside in Alphabet at around USD 350 per share.

Big picture: Alphabet’s AI business is growing at a breakneck speed. We believe that to fund this growth, Alphabet needs to invest more, as the returns from these investments are already palpable.