Google Cloud and Beyond: Can Alphabet’s $2 Trillion Valuation Soar Higher?
Alphabet is our largest position, and for good reason. In this article, we provide a fresh update on its recent performance, key strategic developments, competitive position in the tech landscape, and valuation.
It's been a year since our last in-depth coverage, where we focused on Alphabet's Cloud and YouTube segments. At that time, the stock was trading at $138 per share, compared to our valuation of $168. Since then, the stock has reached $180, marking a strong 30% gain.
Here’s the link to our full report for those interested in a deeper dive.
Contents:
Introduction
Performance Update
Industry
Valuation
Conclusion
1. Introduction
The stock: Alphabet’s market cap as of 13th of November stands at $2.2T with a 52-week low of $128 and a 52-week high of $192, whereas it currently trades at $180 with year to date returns of 28%. Analysts have a 12-month target price of $209 representing an upside of 16%.
Valuation: Alphabet trades at a TTM EV/EBITDA ratio of 16.8x (5-Year average of 17.6x) and a TTM Price / Earnings ratio of 24.0x (5-Year average of 27.0x).
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Why Alphabet? Alphabet Inc. holds a commanding presence in tech, with Google Search leading digital advertising and YouTube dominating the streaming space. In cloud computing, Google Cloud is steadily gaining ground, riding the wave of global digital transformation. Alphabet also leverages its vast resources to pursue visionary bets, like Waymo’s pioneering work in autonomous vehicles, giving it an edge in shaping future industries.
1. Performance update
a. Overall Performance
Alphabet delivered a strong Q3 2024, with revenue climbing 15% year-over-year to $88.3 billion, led by solid growth across Google Services and Google Cloud. Additionally, YouTube hit a significant milestone, surpassing $50 billion in revenue over the past four quarters while the launch of Pixel 9 devices saw great demand. Alphabet’s ecosystem continues to demonstrate its vast reach, with Google Maps becoming the company’s seventh product to surpass 2 billion monthly active users. Meanwhile, Google Cloud continued to impress with a 35% YoY revenue increase, driven by high demand for AI-powered services.
This overall growth boosted Alphabet’s operating margin by 4.5 percentage points, reaching 32.3% compared to 27.8% a year ago, underscoring Alphabet’s earnings power and operating leverage inherent in its model.
Two years ago, CEO Sundar Pichai emphasized disciplined investments and efficiency. Since then, Alphabet has cut its workforce by 3% (from 187,000 to 181,000 employees), while revenue surged from $69 billion to $88.3 billion (a 28% increase), driving operating margins from 24.8% to 32.3%.
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b. Google Services
The Google Services segment, which includes both advertising revenue and income from subscriptions, platforms, and devices, generated $76.5 billion in Q3, making up 87% of Alphabet’s total revenue and reflecting a 12.5% year-over-year growth. Operating margin for this segment also rose significantly, increasing to 40.3% from 35.2% a year earlier.
Total advertising revenue, encompassing Google Search, YouTube, and Google Network, reached $65.9 billion (75% of total revenue), marking a 10.4% increase from the previous year. Growth was driven primarily by Search (up 12.2%) and YouTube Ads (up 12.2%), although Google Network revenue declined for the ninth consecutive quarter.
Despite Google’s dominance in digital ad spend, competition from Amazon and Meta is intensifying. For comparison, Amazon’s advertising revenue reached $14.3 billion, growing by 19%, while Meta’s advertising revenue stood at $39.9 billion, also up 19%.
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c. Google Search
Google Search revenue grew by 12.2% in Q3 2024, reaching $49.4 billion, demonstrating its resilience amid concerns over generative AI’s potential impact on search platforms. Despite these concerns, Google Search maintains a dominant 89.3% market share, slightly down from 91.6% in October 2023. In contrast, Microsoft Bing has made modest gains, increasing its market share to 4.15% from 3.1% in the same period, but Google continues to outperform Bing in search revenue growth over the past six quarters.
