On June 1, Alphabet (NAS: GOOGL) announced equity offerings totaling $80 billion. The offerings are split between $30 billion in public issuance, with $15 billion in convertible preferred stock, a $40 billion program to mostly fund employee equity taxes, and a $10 billion private placement to Berkshire Hathaway.

Why it matters: Despite the $80 billion headline number, we believe the real number relevant to investors is $50 billion, with $30 billion of the At-The-Market, or ATM, program representing an administrative change in how Alphabet meets its employee equity grant-related tax obligations.

  • That said, even a $50 billion capital raise to fund the firm’s artificial intelligence ambitions is material, provided that the firm has already raised more than $85 billion in debt capital markets over the past year.
  • We believe that these raises across the capital stack should be viewed as a clear signal from Alphabet it plans to substantially increase its AI investments as the firm becomes more sure-footed about the returns associated with these investments.

The bottom line: We maintain our $433 fair value estimate for wide-moat Alphabet and view the market’s reaction, sending shares down 4%, as an overreaction. We view shares as attractive for long-term buyers at current levels.

  • While the headline number may suggest a 2% EPS dilution, we believe that once adjusted for the ATM tax mechanism as well as the capped calls that hedge the dilution risk associated with the convertible stock, investors should look at an effective dilution risk of less than 1%.
  • Long-term investors should take some confidence in the fact that Berkshire, the quintessential long-term investor, sees upside in Alphabet at around $350 per share.

Big picture: Alphabet’s AI business is growing at a breakneck speed. We believe that to fund this growth, Alphabet needs to invest more, as the returns from these investments are already palpable.

Alphabet Is an AI leader with its full-stack AI approach driving success across its segments

We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has built itself into a true behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals, including search, artificial intelligence, video, and cloud computing.

Alphabet’s core strategy is to preserve its strong advertising business, with the majority of advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.

We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. We believe that by leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.

On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.

Beyond search, we have a positive outlook on Alphabet’s cloud computing platform, Google Cloud Platform. We believe increased migration of workloads to the public cloud and an uptick in the deployment and usage of AI are key growth drivers for GCP over the next five years. At the same time, we believe that as GCP scales, it will become a more important part of Alphabet’s overall business, both from a top-line and profitability perspective.

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.

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 search market through the imposition of deep, structural changes in the space.