Alphabet
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Broad
- Morningstar Uncertainty Rating: Medium
- Sector: Internet content and information
Alphabet is a holding company that wholly owns internet giant Google, with Google services accounting for nearly 90% of Alphabet's revenue. We view Google as a pioneer in AI, and its investments in AI are a continuation of its efforts to secure its core product, Google Search. This cheap AI stock is trading 27% below our fair value estimate of $237 per share.
"We view Alphabet as a conglomerate with excellent businesses. With solutions ranging from advertising to cloud computing to self-driving cars, Alphabet has become a true technology giant, generating tens of billions of dollars in free cash flow annually. Although antitrust concerns regarding Alphabet's core business, the search engine, have made headlines, we remain confident in Alphabet's overall strength and expect the company to remain at the forefront of a variety of industries, including search, artificial intelligence, video and cloud computing.
Alphabet's core strategy is to maintain its strong advertising business, with the majority of advertising revenue coming from Google Search. To this end, the company has invested significantly in improving its search capabilities over the years to ensure that its search engine remains firmly entrenched in the way hundreds of millions of users access information on the internet.
We see the company's investment in AI as a continuation of these efforts to protect its core product, Google Search. We believe that by deploying generative AI, Google can not only improve the quality of its search through features such as AI overviews, but also optimize its advertising business by improving its ability to target customers with relevant ads.
In the area of antitrust, we do not expect Google's search business to deteriorate significantly due to government or court intervention. While there are a number of possible outcomes depending on what remedies are imposed, we believe it is likely that Google will maintain its leadership position in search and text-based advertising over the long term.
Beyond search, we see positive prospects for Alphabet's cloud computing platform, Google Cloud Platform. We believe that the increasing shift of workloads to the public cloud and the rise in the adoption and use of AI will be key growth drivers for GCP over the next five years. At the same time, we expect GCP to become an increasingly important part of Alphabet's overall business from both a revenue and profitability perspective as it grows in size."
Malik Ahmed Khan, Morningstar Analyst
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