Key Morningstar Metrics for Alphabet
- Fair Value Estimate: USD 340
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
Adweek reported that Alphabet GOOGL has indicated to advertisers that the firm is working on rolling out ads on Gemini, its AI chatbot, in 2026. Alphabet’s shares sold off more than 2% as investors question the product impact of ads and whether ads could negatively affect Gemini’s strong momentum.
Why it matters: We see this move, if properly executed, as value-additive for Alphabet. The firm’s distribution on Gemini, which has more than 650 million monthly users, could grow materially if it offers more powerful artificial intelligence tools to more users in exchange for ads placed in Gemini.
- While according to reports OpenAI is deprioritizing its ads push to focus more on the product, Alphabet appears to be focusing on monetization.
- We reiterate our view that subscriptions are a sub-optimal monetization vector as the vast majority of global users simply do not wish to part with USD 20 per month for AI tools. We believe that, like search, we will see ads emerge as the optimal monetization strategy for GenAI chatbots.
The bottom line: We retain our USD 340 fair value estimate for wide-moat Alphabet. If the firm launches ads and can provide advertisers a high return on ad spending, or ROAS, while growing its user base, we expect there to be upside to our valuation as more ad dollars would flow into Alphabet.
- Google Search has an average revenue per user, or ARPU of USD 44. Put another way, Alphabet sells ads worth USD 44 per user. While subscription offers much more upside per paying user, the paid to total user ratio is incredibly low, with ChatGPT’s ratio of paid users at roughly 5%.
- As a result, we think introducing ads would be Alphabet pursuing what we view to be the optimal strategy, one that includes both an unpaid, ad-supported tier and a subscription-based, no-ad tier.
Big picture: We think Alphabet’s expertise in advertising will drive Gemini’s ROAS higher and make the platform an attractive proposition for advertisers looking for GenAI traffic to their products.
