Alphabet released its third-quarter earnings report on Wednesday, Oct. 29. Here’s Morningstar’s take on Alphabet’s earnings and stock.
Key Morningstar Metrics for Alphabet
- Fair Value Estimate: $340.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of Alphabet’s Q3 Earnings
Alphabet reported solid third-quarter earnings, with sales growing 16% to $102 billion and adjusted operating margins expanding 160 basis points to 34%. Google Cloud continues to fire on all cylinders, accelerating sequentially to 34% growth in the quarter, constituting 15% of total sales.
Why it matters: Alphabet’s execution on artificial intelligence—evidenced by strong traction for its Gemini app, which has more than 650 million monthly users, along with its ability to deliver solid advertising revenue—continues to drive results while refuting the AI-led disruption narrative.
- Within search, we like AI Overviews and AI Mode as tools that not only retain users but also drive incremental query growth and improved user engagement. With higher query growth driven by these AI features, Alphabet can increase its ad inventory, lifting sales in the process.
- Also, as agent-driven web browsing takes off, having access to and control over Chrome’s multibillion-user base will be crucial, as agentic commerce features could allow Alphabet to command a hefty take rate on agent-led commerce activity, unlocking a new growth vector.
The bottom line: We are raising our fair value estimate for wide-moat Alphabet to $340 from $300 following the firm’s quarterly results, which blew past our expectations. The 79% growth in the firm’s Google Cloud backlog, up from 37% last quarter, points to an inflection in cloud demand coming in 2026.
- Based on the massive increase in Google Cloud’s backlog, we are raising our Google Cloud five-year growth to 34%, up from 30% in our prior forecast. This increase is the key driver behind our fair value increase.
- In the past six months, Alphabet’s stock has risen more than 75% as the market has come to agree with our view of Alphabet as an AI leader, not a laggard. With our fair value increase, we see further upside as Google Cloud continues to drive AI monetization while search remains solid.
Fair Value Estimate for Alphabet
With its 4-star rating, we believe Alphabet’s stock is moderately undervalued compared with our long-term fair value estimate of $340, which implies a 2025 adjusted price/earnings multiple of 32 times and an enterprise value/adjusted EBITDA multiple of 25 times.
We forecast Alphabet’s top line growing at a 13% compound annual growth rate over the next five years. Drilling deeper into the firm’s various segments, we expect Google Search to grow at a high-single-digit level over the next five years as the digital advertising market matures and growth rates taper off after a robust few years following the pandemic. We expect YouTube to grow at a low-double-digit rate over the next five years, with a strong advertising business being increasingly supported by a robust subscription business.
Read more about Alphabet’s fair value estimate.
Economic Moat Rating
We believe Alphabet merits a wide economic moat rating owing to the intangible assets, network effect, cost advantage, and customer switching costs that permeate a variety of businesses that it owns.
While Alphabet’s own reporting operating segments are split into Google services, Google Cloud, and other bets, we believe that for the purposes of analyzing the firm’s economic moat and durable competitive advantage, a different split is more appropriate. In our moat analysis, we look at Google Search, YouTube, Google Cloud, Android and Google Play, devices, and other bets (which includes Google’s aspirational projects such as self-driving vehicles and internet access).
Read more about Alphabet’s economic moat.
Financial Strength
We view Alphabet’s financial position as virtually unassailable. The firm closed 2024 with cash and cash equivalents of $96 billion, more than offsetting its debt balance of $11 billion.
The firm’s advertising business is a cash-generating machine, churning out tens of billions of dollars in free cash flow annually. Alongside advertising, Alphabet is making progress on diversifying its cash generation, with Google Cloud and YouTube subscription sales as additional free cash flow drivers.
Read more about Alphabet’s financial strength.
Risk and Uncertainty
We assign Alphabet an Uncertainty Rating of Medium. This reflects our belief that despite the near-term uncertainty around antitrust regulation and potential competition in the AI-infused search market, Alphabet is well-positioned to expand its overall business while maintaining a rock-solid balance sheet.
We believe Google’s intangible assets and network effects will likely safeguard its dominance in the search space. Further, the firm’s continued investments in AI, which Alphabet can leverage across nearly every business it operates, should be value-accretive. We do think Google Search’s status as the runaway leader in search could come under pressure, primarily due to the antitrust scrutiny. While we don’t see the firm’s market leadership slipping due to antitrust concerns, this issue adds uncertainty to an otherwise-stable business.
Read more about Alphabet’s risk and uncertainty.
GOOGL Bulls Say
- Alphabet’s core advertising business is deeply entrenched in advertising budgets, letting it benefit from a secular increase in digital advertising spending
- The firm’s advertising business generates substantial cash flows that it can reinvest in growth areas such as GCP, AI-infused search, and aspirational projects like Waymo.
- Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.
GOOGL Bears Say
- While Alphabet is seeking to diversify its business away from search, text-based advertising remains the largest contributor to the firm’s top line, creating a concentration risk.
- Alphabet’s continued investments in new, often unproven technologies have been a drag on cash flows.
- Regulators around the world are keying in on Alphabet’s search dominance and could upend the search market through the imposition of deep, structural changes in the space.
This article was compiled by Lauren Solberg.
