Alphabet GOOG released its second-quarter earnings report on July 23. Here’s Morningstar’s take on Alphabet’s earnings and stock.

Key Morningstar metrics for Alphabet

  • Fair Value Estimate: $237.00
  • Morningstar Rating: ★★★★
  • Economic Moat: Wide
  • Morningstar Uncertainty Rating: Medium

What we thought of Alphabet’s Q2 earnings

Alphabet reported solid second-quarter earnings that included sales of $96 billion, up 14%, and operating margins of 32%, flat year over year. Google Cloud continued to increase its contributions to the top line, expanding by 32%, as AI-driven demand for cloud infrastructure remained solid.

Why it matters: Alphabet’s strong second-quarter results, along with management commentary on solid artificial intelligence adoption and usage further strengthen our confidence in the firm’s competitive positioning in AI and the resilience of its core Search business.

  • We like the integration of AI features (AI Overviews and AI Mode) within Google Search and view these additions as important in maintaining Google Search’s relevance, especially with younger users, while opening up new generative AI monetization vectors for the firm.
  • Google Search’s 12% year-over-year growth, accelerating from 10% growth last quarter, further reflects Google Search’s resilience in the face of both gen AI-infused competitors as well as a tough macro, with spending on Search coming in well ahead of our prior 8% growth estimate.

The bottom line: We maintain our $237 fair value estimate for wide-moat Alphabet. We attribute the muted after-hours stock price reaction to the updated capital expenditure guidance, with the firm now expecting $85 billion in capital expenditures, up from $75 billion previously guided to.

  • We view these investments as necessary and capable of producing strong returns. We see Alphabet’s full-stack AI strategy, with investments across hardware, cloud, and applications as well set up to both reduce costs and catalyze gen AI sales over time.
  • We continue to view Alphabet as undervalued and trading in 4-star territory. We expect that as AI adoption and monetization remain strong and Google Search’s resilience surprises investors to the upside, the market’s view on the name will converge with our bullish stance.

Fair value estimate for Alphabet

With its 4-star rating, we believe Alphabet’s stock is undervalued compared with our long-term fair value estimate of $237. We forecast the firm’s top line growing at an 10% compound annual growth rate over the next five years.

Drilling deeper into the various segments, we expect Google Search to grow at a mid-to-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 growing subscription business.

We view Google Cloud as a key growth driver for Alphabet’s overall business. We project sales to grow 26% annually on average over the next five years as cloud migrations, increased usage of AI, and additional software add-ons all work together to bolster the firm’s cloud sales. Alongside the firm’s public cloud business, we believe Google Cloud will benefit from increased usage of Google’s Workspace productivity applications as the firm embeds more AI tools within them, improving their quality while attracting higher average revenue per user, or ARPU. Over the next five years, we expect Google Cloud to constitute around 25% of Alphabet’s overall top line, up from 12% at the end of 2024.

Economic Moat Rating

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 businesses that it owns. While Alphabet’s reported operating segments are split into Google Services, Google Cloud, and Other Bets, we believe that when analyzing the firm’s moat and durable competitive advantage, a different split is more appropriate. 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).

We believe that as some of the technologies Alphabet has invested in mature, they could spin off to be standalone businesses or perhaps be a larger part of the Alphabet story. We have particularly high hopes for Waymo, which has consistently shown promising results and progress in the AV market. We also understand that Alphabet, as a large incumbent, continues to invest in aspirational technologies such as Waymo as a way to be at the forefront of technological innovation. At the same time, however, there is considerable uncertainty over whether any of Alphabet’s aspirational investments will be economically successful.

Financial strength

We view Alphabet’s financial position as virtually unassailable. The firm closed 2024 with cash and cash equivalents of $96 billion, more than offsetting its debt balance of $11 billion. The firm’s advertising business is a cash-generating machine, churning out tens of billions of dollars in free cash flow annually. Alongside advertising, Alphabet is making progress on diversifying its cash generation, with Google Cloud and YouTube subscription sales as additional free cash flow drivers.

Risk and uncertainty

We assign Alphabet an Uncertainty Rating of Medium. Our rating reflects our belief that despite the near-term uncertainty around antitrust regulation and potential competition in the AI-infused search market, Alphabet is well-positioned to expand its overall business while maintaining a rock-solid balance sheet.

We believe Google’s intangible assets and network effects will likely safeguard its dominance in the search space. Further, the firm’s continued investments in AI, which Alphabet can leverage across nearly every business it operates, should be value-accretive. At the same time, we think Google Search’s status as the runaway leader in search could come under pressure, primarily due to the antitrust scrutiny. While we don’t see the firm’s market leadership slipping due to antitrust concerns, this issue adds uncertainty to an otherwise stable business.

The other key area of uncertainty for Alphabet as a whole is AI. The firm has invested (and continues to invest) a considerable amount of capital into new AI technologies, such as generative AI. This adds uncertainty to the range of possible outcomes for Alphabet’s top line and profitability.

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, via its Other Bets business have been a drag on cash flows.
  • Regulators around the world are keying in on Alphabet’s search dominance and could upend the search market through the imposition of deep, structural changes in the search space.

Get Morningstar’s insights in your inbox