Key Morningstar Metrics for Alphabet
- Fair Value Estimate: $340.00
- Morningstar Rating: ★★★
- Economic Moat: Wide
- Morningstar Uncertainty Rating: Medium
In a year when mega-sized technology stocks staged a broad rally, Alphabet GOOGL/GOOG stock was one of the biggest winners. The company’s new Gemini 3 model solidified its standing in the artificial intelligence race, and concerns faded about regulatory risk. Now the question for investors is whether the stock is still a buy.
Alphabet stock has rallied roughly 48% since Sept. 1, leading to a 60.5% year-to-date gain. Priced north of $300 per share, the stock is more than double its previous all-time high, set in 2021. Over the past three years, the stock is up over 230% through Dec. 17.
“The leap to Gemini 3 and its ability to outshine its peers, especially OpenAI’s ChatGPT, has been the major catalyst,” explains Morningstar equity analyst Malik Ahmed Khan. He thinks that for this recent rally to continue, the company’s Google Search and Cloud businesses must both stay resilient. He notes that some risks remain.
What Drove Alphabet’s Rally?
The stock rose by leaps and bounds starting in September, driven by multiple factors, including strong third-quarter earnings results, a satisfactory resolution to Google’s antitrust case, and optimism about the release of the company’s newest Gemini 3 large language model.
Khan calls Gemini 3 the “icing on the cake,” saying it was “a major step up from prior models, and it really positioned Alphabet as an AI leader, not a laggard.” He says Gemini 3’s “multi-modal” capabilities—meaning it can generate video and images in addition to text—constitute a “huge competitive advantage,” because users who previously relied on competing LLMs have a reason to switch.
Khan compares Alphabet’s situation to the evolution of social media companies such as Facebook (Meta Platforms META) and Snap SNAP, which expanded into video and reels as they matured. “The winnings accrue to the ones with multi-modal capabilities … Google is significantly better than any of its peers now.” Monthly active users already increased to about 650 million from 450 million before the launch of Gemini 3, and Khan expects another jump when fourth-quarter earnings are released.
Early in September, investor concerns eased around the Justice Department’s antitrust case over Google Search, as Justice Mehta’s ruling allowed Alphabet to avoid divestiture of Chrome and Android.
Alphabet’s third-quarter earnings results showed continued strength in Google Search, further dispelling fears. “The entire narrative was that search was dying and Alphabet was not equipped to defend its turf, but the data never supported that,” says Khan.
What’s the Outlook for Alphabet?
Khan says concerns remain, and that some things could cause Alphabet’s rally to falter. Search queries could weaken, cloud growth could slow, or 2026 capital expenditures could come in higher than the market expects. (Though he notes that all companies in the AI space face that last risk.)
One reason for cautious optimism is the company’s new in-house tensor processing units, which are custom chips for training and running LLMs. “This opens up a new monetization vector through third-party deployments,” Khan says, citing Alphabet’s recent partnership with Anthropic. However, there are further risks, since Alphabet’s ability to produce TPUs is limited in scale. “TPUs are made at the same factory as Nvidia GPUs,” Khan says, “The bottleneck of [Taiwan Semiconductor Manufacturing] exists for both [Nvidia and Alphabet].”
In the near term, Khan says additional risks remain around potential softening in Google Search, Cloud revenue, and overall profitability. Investors also want clearer evidence that heavy AI investment is translating into measurable improvements across Alphabet’s businesses. Khan says the company can tell this story more easily than many of its peers because it can “point to Search, YouTube, and Waymo ... other players do not have the same diversity of monetization factors.”
Khan sees the stock as fairly valued at $340 per share, which was raised in September from $237. The bottom line depends on investors’ conviction in Google Search. “It’s important to understand that 30%-40% of Alphabet’s business value comes from Google Search,” Khan says. “The view that has emerged so far is that Search isn’t as dead as we thought it was. Long term, search may still be impacted, but we don’t have to worry about that right now.”
The following are excerpts from Khan’s commentary on Alphabet.
Economic Moat
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 its businesses.
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).
Fair Value and Profit Drivers
Our fair value estimate is $340 per share, implying 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.
GOOG Bulls Say
- Alphabet’s core advertising business is deeply entrenched in advertising budgets, allowing the firm to 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 such as Waymo.
- Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.
GOOG 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 market through the imposition of deep structural changes.
