Thematic evaluation
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Alphabet, Inc. (GOOG)

September 21, 2024

Compared to: Meta Platforms, Inc. (META) | Microsoft Corp. (MSFT) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

Alphabet appears slightly undervalued based on its strong financial performance, market leadership in key growth areas like AI and cloud services, and conservative valuation multiples relative to peers and growth prospects. The company's robust profitability metrics and cash flow generation, combined with its strategic investments in future technologies, suggest that the current valuation does not fully reflect its long-term potential.

Key takeaways
  • Alphabet is a financially strong company with a strong track record of revenue growth and profitability.
  • The company is investing heavily in technical infrastructure and AI capabilities, which is expected to drive future growth.
  • Alphabet is effectively managing costs and improving profitability.
  • The company has a strong liquidity position and a conservative capital structure.
  • The company is returning capital to shareholders through dividends and share repurchases.
  • Alphabet faces significant risks from competition, regulatory scrutiny, and macroeconomic factors.
  • The company's future outlook is positive, with strong revenue growth and expanding profitability expected.
  • GOOG's valuation is in line with its peers, indicating a fair valuation.
  • GOOG's price performance has been mixed, with higher volatility and a higher risk profile than XLK.
  • GOOG's risk-adjusted return is moderate compared to its peers, with a lower risk than META but a higher risk than MSFT.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Alphabet Inc. is a holding company that operates through three segments: Google Services, Google Cloud, and Other Bets. Google Services is the largest segment, generating revenue primarily from online advertising, consumer subscriptions, platforms (e.g., Google Play), and device sales (e.g., Pixel phones). Google Cloud provides infrastructure, platform, and collaboration services to enterprise customers. Other Bets is a collection of smaller, non-Google businesses focused on healthcare, transportation, and other initiatives.
    • Alphabet's target market is global, encompassing consumers and businesses across various industries. The company leverages its vast user base, data insights, and technological expertise to provide a wide range of products and services.
    • We will be using the Technology Select Sector SPDR Fund (XLK) as a benchmark for comparing GOOG's price performance and risk-adjusted returns. We will also be comparing GOOG to its industry peers, Microsoft Corp. (MSFT) and Meta Platforms, Inc. (META), to assess its relative financial performance, growth potential, and risk profile.

  2. Financial Performance:

    • Alphabet has consistently demonstrated strong revenue growth, driven by increases in Google Services and Google Cloud. Revenue grew 9% year-over-year in the most recent quarter, with Google Services growing 8% and Google Cloud growing 26%.
    • The company has a strong profitability position, with high return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC). ROA, ROE, and ROIC have all been consistently above 20% in recent quarters, indicating efficient asset utilization and strong profitability.
    • Alphabet's profitability is significantly higher than the industry average, indicating a strong competitive advantage. Its net profit margin is consistently above 25%, significantly higher than the industry average of -2114.30%.
    • Compared to its peers, GOOG has shown mixed performance. While it has outperformed MSFT in the short term (YTD, 6 months), it has consistently underperformed META across all periods. This suggests that GOOG's growth potential may be lower than META's, but it has been more stable than META.

  3. Operational Efficiency:

    • Alphabet has a strong liquidity position, with a current ratio and quick ratio both greater than 1. This indicates that the company has sufficient liquid assets to cover its short-term liabilities.
    • The company has a strong solvency position, with a low debt-to-equity ratio and a low debt-to-EBITDA ratio. This indicates a low level of financial risk and a conservative capital structure.
    • Alphabet generates a high level of free cash flow, which it uses to invest in technical infrastructure and AI capabilities, as well as return capital to shareholders through dividends and share repurchases.
    • The company's capital expenditures have been consistently high, driven by investments in technical infrastructure and AI capabilities. This is expected to drive future growth, but it also puts pressure on profitability in the short term.
    • Alphabet has initiated a quarterly cash dividend program and increased its share repurchase authorization, which is expected to provide a steady stream of returns to shareholders.
    • Compared to its peers, GOOG has exhibited lower annualized volatility than META, but higher volatility than MSFT. This suggests that GOOG may be a less risky investment than META, but more risky than MSFT.

  4. Growth Opportunities:

    • Alphabet is expected to continue to invest heavily in technical infrastructure and AI capabilities, which will likely lead to further increases in fixed assets and capital expenditures.
    • The company is expected to continue to return capital to shareholders through dividends and share repurchases, which will likely lead to further increases in shareholders' equity and decreases in cash dividends paid and change in capital stock.
    • Future revenue growth is expected to be strong, driven by continued growth in Google Services and Google Cloud.
    • Profitability margins are expected to continue to expand, as the company continues to invest in technical infrastructure and AI capabilities.
    • Alphabet is making substantial progress in its AI initiatives, with Gemini models being widely adopted across its products and generating significant revenue for Cloud customers.
    • The company's strategic priorities include further strengthening its technical infrastructure, expanding its AI-powered offerings, and maintaining its leadership in key areas like Search and YouTube.

  5. Risks and Threats:

    • Alphabet faces intense competition across its business segments and must continually innovate to maintain its market position.
    • Regulatory scrutiny, particularly around antitrust and data privacy issues, poses significant risks and could lead to fines, legal actions, and changes to business practices.
    • Macroeconomic conditions, foreign exchange fluctuations, and other external factors can impact Alphabet's revenues and profitability.
    • The company's reliance on advertising revenues makes it vulnerable to potential loss of partners or impact from ad-blocking technologies.
    • Challenges in integrating new businesses, products, and technologies acquired or developed could hinder growth and profitability.

  6. Valuation Analysis:

    • Alphabet's valuation metrics, such as P/E and EV/EBITDA, are generally in line with its peers, indicating a fair valuation.
    • The company's strong financial performance, growth potential, and market leadership position support its current valuation.
    • Potential catalysts for future growth include continued adoption of AI technologies, expansion of Google Cloud services, and growth in digital advertising.

  7. Price Performance:

    • GOOG has shown mixed performance compared to XLK over the past three years. While it has outperformed XLK in the short term (YTD, 1 Week, and 6 Months), it has underperformed in the longer term (1 Year, 2 Years, and 3 Years). This suggests that GOOG's performance is more volatile and less consistent than XLK.
    • GOOG has been more volatile than XLK, as evidenced by its higher annualized volatility. This indicates that GOOG carries a higher level of risk than XLK.
    • GOOG's maximum drawdown was significantly higher than XLK's, indicating that GOOG is more susceptible to significant losses during market downturns. This further reinforces its higher risk profile.
    • Compared to its peers, GOOG has generally had a higher Sharpe ratio than META, but a lower Sharpe ratio than MSFT. This suggests that GOOG may offer a better risk-adjusted return than META, but a lower risk-adjusted return than MSFT.

  8. Future Outlook:

    • Alphabet's management team remains confident in the company's ability to capitalize on the AI opportunity and continue delivering long-term growth, despite near-term challenges such as macroeconomic headwinds and the transition away from third-party cookies.
    • The company expects a slight increase in headcount in Q3 as it brings on new graduates.
    • Quarterly CapEx is expected to remain at or above the Q1 level of $12 billion, driven by investments in technical infrastructure.
    • Alphabet anticipates continued strong performance in Search and Cloud, though it will be lapping increased advertising strength in the second half of 2023.

  9. Summary:

    • Alphabet is a financially strong company with a strong track record of revenue growth and profitability.
    • The company is investing heavily in technical infrastructure and AI capabilities, which is expected to drive future growth.
    • Alphabet is effectively managing costs and improving profitability.
    • The company has a strong liquidity position and a conservative capital structure.
    • The company is returning capital to shareholders through dividends and share repurchases.
    • Alphabet faces significant risks from competition, regulatory scrutiny, and macroeconomic factors.
    • The company's future outlook is positive, with strong revenue growth and expanding profitability expected.
    • GOOG's valuation is in line with its peers, indicating a fair valuation.
    • GOOG's price performance has been mixed, with higher volatility and a higher risk profile than XLK.
    • GOOG's risk-adjusted return is moderate compared to its peers, with a lower risk than META but a higher risk than MSFT.
    • Overall, Alphabet is a well-positioned company with strong growth potential, but investors should be aware of the risks associated with its business.
Peer fundamentals 
Fundamentals
Insights
  • Alphabet Inc. is a financially strong company with a strong track record of revenue growth and profitability.
  • The company is investing heavily in technical infrastructure and AI capabilities, which is expected to drive future growth.
  • The company is effectively managing costs and improving profitability.
  • The company has a strong liquidity position and a conservative capital structure.
  • The company is returning capital to shareholders through dividends and share repurchases.
  • The company faces significant risks from competition, regulatory scrutiny, and macroeconomic factors.
  • The company's future outlook is positive, with strong revenue growth and expanding profitability expected.
Analysis
  • Revenue - Revenue growth is strong and driven by increases in Google Services and Google Cloud. - The company is effectively managing costs and improving profitability. - The company is investing heavily in technical infrastructure and AI capabilities. - Revenue growth is linked to the continued shift towards the online/digital economy and increasing user adoption of mobile devices. - Management's forward guidance indicates continued strong performance in Search and Cloud, though it will be lapping increased advertising strength in the second half of 2023.
    • Profitability
      • The company has a strong profitability position, with high return on assets, return on equity, and return on invested capital.
      • The company's profitability is improving, as evidenced by the increasing profitability ratios.
      • The company's profitability is significantly higher than the industry average, indicating a strong competitive advantage.
    • Liquidity
      • The company has a strong liquidity position, with a current ratio and quick ratio both greater than 1.
      • The company's liquidity is slightly less than the industry average, but still considered strong.
    • Solvency
      • The company has a strong solvency position, with a low debt-to-equity ratio and a low debt-to-EBITDA ratio.
      • The company's solvency is significantly better than the industry average, indicating a low level of financial risk.
    • Operational Efficiency
      • The company is effectively utilizing its assets to generate revenue, as evidenced by the high return on assets and return on equity.
    • Cash Flow Analysis
      • The company has a strong cash flow position, with a high level of free cash flow generation.
      • The company is investing heavily in technical infrastructure and AI capabilities, which is expected to drive future growth.
      • The company is actively managing its investments, with a significant increase in purchase/sale of investments.
      • The company has initiated a quarterly cash dividend program, which is expected to provide a steady stream of returns to shareholders.
      • The company has increased its share repurchase authorization, which is expected to further enhance shareholder returns.
    • Risk Factors
      • The company faces intense competition across its business segments and must continually innovate to maintain its market position.
      • Regulatory scrutiny, particularly around antitrust and data privacy issues, poses significant risks and could lead to fines, legal actions, and changes to business practices.
      • Macroeconomic conditions, foreign exchange fluctuations, and other external factors can impact Alphabet's revenues and profitability.
    • Future Outlook
      • The company is expected to continue to invest heavily in technical infrastructure and AI capabilities, which will likely lead to further increases in fixed assets and capital expenditures.
      • The company is expected to continue to return capital to shareholders through dividends and share repurchases, which will likely lead to further increases in shareholders' equity and decreases in cash dividends paid and change in capital stock.
      • Future revenue growth is expected to be strong, driven by continued growth in Google Services and Google Cloud.
      • Profitability margins are expected to continue to expand, as the company continues to invest in technical infrastructure and AI capabilities.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison:
    • GOOG has shown mixed performance compared to XLK over the past three years. While it has outperformed XLK in the short term (YTD, 1 Week, and 6 Months), it has underperformed in the longer term (1 Year, 2 Years, and 3 Years). This suggests that GOOG's performance is more volatile and less consistent than XLK.
  • Risk and Return Analysis:
    • GOOG has provided lower annualized returns than XLK over the past three years. This is consistent with its underperformance in the longer term.
    • GOOG has been more volatile than XLK, as evidenced by its higher annualized volatility. This indicates that GOOG carries a higher level of risk than XLK.
    • GOOG's maximum drawdown was significantly higher than XLK's, indicating that GOOG is more susceptible to significant losses during market downturns. This further reinforces its higher risk profile.
  • Risk-Adjusted Performance:
    • XLK has consistently offered a better risk-adjusted return than GOOG, as indicated by its higher Sharpe ratio. This suggests that XLK has been more efficient in generating returns relative to its risk.
    • GOOG's beta value, consistently above 1, indicates that it is more sensitive to market movements than the overall market. This suggests that GOOG's price is likely to fluctuate more than the market, making it a riskier investment.
  • Overall Assessment:
    • GOOG has shown mixed performance compared to XLK, with higher volatility and a higher risk profile. While it has outperformed in the short term, its underperformance in the longer term and higher drawdowns suggest that it is a riskier investment than XLK.
    • XLK has consistently offered better risk-adjusted returns than GOOG, making it a more attractive investment for investors seeking a more stable and less volatile investment.
    • The recent trends in volatility and Sharpe ratios suggest that both GOOG and XLK may be experiencing an improvement in risk-adjusted returns, but GOOG remains a riskier investment than XLK.
Peers Price History(as of 2024-09-04)
Meta Platforms, Inc. (META)Microsoft Corp. (MSFT)
  • Performance Comparison:
    • GOOG has shown mixed performance compared to its peers. While it has outperformed MSFT in the short term (YTD, 6 months), it has consistently underperformed META across all periods. This suggests that GOOG's growth potential may be lower than META's, but it has been more stable than META.
    • The performance of GOOG has been less consistent than MSFT, with periods of both outperformance and underperformance. This suggests that GOOG's growth trajectory may be less predictable than MSFT's.
  • Risk and Return Analysis:
    • GOOG has generally provided lower annualized returns than META, but higher returns than MSFT. This suggests that GOOG may offer a more balanced approach to risk and return compared to its peers.
    • GOOG has exhibited lower annualized volatility than META, but higher volatility than MSFT. This suggests that GOOG may be a less risky investment than META, but more risky than MSFT.
    • GOOG's maximum drawdown has been lower than META's, but higher than MSFT's. This indicates that GOOG's risk profile is moderate compared to its peers, with a lower risk than META but a higher risk than MSFT.
  • Risk-Adjusted Performance:
    • GOOG has generally had a higher Sharpe ratio than META, but a lower Sharpe ratio than MSFT. This suggests that GOOG may offer a better risk-adjusted return than META, but a lower risk-adjusted return than MSFT.
    • GOOG's beta value has been consistently above 1, indicating that it is more volatile than the overall market. However, its beta has been lower than META's, suggesting that it is less sensitive to market movements than META.
  • Overall Assessment:
    • GOOG appears to be a moderately risky investment with a balanced approach to risk and return. It has shown mixed performance compared to its peers, with periods of both outperformance and underperformance. While its growth potential may be lower than META's, it has been more stable than META. GOOG's risk profile is moderate compared to its peers, with a lower risk than META but a higher risk than MSFT.
    • The recent trends in volatility, drawdowns, and Sharpe ratios suggest that GOOG may be becoming less volatile and offering better risk-adjusted returns. However, it is important to note that META has consistently exhibited higher growth potential and higher risk.
Peers Fundamentals(as of 2024-06-30)
Meta Platforms, Inc. (META)Microsoft Corp. (MSFT)

  1. Market Position and Size:

    • GOOG is a large-cap company within the technology sector, with a market capitalization of 2011450.0, placing it as the second-largest company in the peer group.
    • GOOG's revenue, EBITDA, and net income are significantly higher than META's, reflecting its larger size and market position.
    • However, GOOG's revenue, EBITDA, and net income are all lower than MSFT's, indicating that it is not the largest player in the industry.

  2. Profitability and Efficiency:

    • GOOG exhibits strong profitability compared to the industry average, with high EBITDA margin and net profit margin.
    • However, its profitability metrics are lower than its peers, suggesting potential for improvement in cost structure or revenue generation.
    • GOOG demonstrates strong efficiency in generating returns on its assets, equity, and capital, exceeding industry averages but lagging behind its peers.

  3. Financial Health and Stability:

    • GOOG maintains a strong financial health, with a conservative debt position and robust cash flow generation.
    • Its liquidity is strong compared to MSFT, but slightly lower than META and the industry average.
    • The conservative debt position indicates a low risk of financial distress and a strong ability to manage financial resources.

  4. Valuation and Market Perception:

    • GOOG's valuation is relatively attractive compared to its peers and the industry average, with lower EV/Sales, EV/EBITDA, and P/E ratios.
    • However, its P/B and P/S ratios suggest a higher valuation compared to the industry, indicating potential for a premium valuation.
    • The market's valuation of GOOG's earnings is lower than its peers, suggesting potential for slower growth or lower profitability expectations.

  5. Cash Flow and Capital Management:

    • GOOG generates significant free cash flow, exceeding META but lagging behind MSFT.
    • Its capital expenditure is relatively lower than MSFT but higher than META.
    • GOOG's strong cash flow generation provides flexibility for investments, shareholder returns, and financial stability.

  6. Growth and Future Prospect:

    • GOOG exhibits strong growth in profitability and efficiency metrics, outperforming peers in EBITDA, Net Income, Basic Earnings per Share, and Return on Average Total Equity.
    • However, its sales growth has been slower than its peers, indicating a need for new revenue growth strategies.
    • GOOG's growth has been accelerating over the past five years, with 5-year CAGRs exceeding 3-year CAGRs for key metrics.

  7. Potential for Investment:

    • GOOG presents an attractive investment opportunity due to its strong financial performance, conservative debt position, and strong cash flow generation.
    • Its valuation is relatively attractive compared to peers and the industry average, suggesting potential for undervaluation.
    • However, investors should consider the slower growth in sales revenue and the potential for increased competition in the technology sector.

  8. Key Risks and Considerations:

    • Slower growth in sales revenue compared to peers may indicate challenges in driving future growth.
    • Increased competition in the technology sector could impact GOOG's market share and profitability.
    • Fluctuations in year-over-year growth rates suggest potential for volatility and dependence on external factors.

  9. Overall Assessment:

    • GOOG is a financially strong company with a dominant market position in the technology sector.
    • Its profitability, efficiency, and cash flow generation are strong, exceeding industry averages but lagging behind its peers in some areas.
    • GOOG's valuation is relatively attractive compared to its peers and the industry average, suggesting potential for undervaluation.
    • However, investors should consider the slower growth in sales revenue and the potential for increased competition in the technology sector.