Alphabet Reports Strong Q3 Earnings, Raises Fair Value Estimate

Alphabet Inc. reported its third-quarter earnings on October 29, 2023, showcasing robust growth across several key areas. The tech giant achieved sales of $102 billion, marking a 16% increase from the previous year. Additionally, adjusted operating margins expanded by 160 basis points to 34%, reflecting efficient cost management and operational excellence.

Key Metrics and Performance Insights

Morningstar, a respected investment research firm, has updated its analysis on Alphabet post-earnings, raising its fair value estimate for the company from $300 to $340. The firm holds a four-star rating for Alphabet, indicating that the stock is moderately undervalued relative to its long-term fair value. The increase in fair value is largely attributed to a remarkable 79% growth in Google Cloud’s backlog, which has surged from 37% in the previous quarter. This significant growth signals a potential inflection point in cloud demand anticipated for 2026.

Alphabet’s performance in artificial intelligence (AI) further propelled its earnings. The success of the Gemini app, which boasts over 650 million monthly users, underscores Alphabet’s advancement in AI capabilities. Innovations like AI Overviews and AI Mode are enhancing user engagement and query growth, which in turn allows Alphabet to expand its advertising inventory and boost sales.

Outlook and Future Growth Potential

Looking ahead, Morningstar forecasts Alphabet’s revenue to grow at a 13% compound annual growth rate over the next five years. Within this projection, Google Search is expected to experience high-single-digit growth, while YouTube could achieve low-double-digit growth as its advertising revenue is bolstered by an expanding subscription base.

Morningstar highlights that Alphabet possesses a wide economic moat due to its strong intangible assets, network effects, and cost advantages. This competitive edge, coupled with customer switching costs, reinforces Alphabet’s position across various sectors, including Google Search, YouTube, Google Cloud, and Android.

Financially, Alphabet remains on solid ground. As of the end of 2024, the company reported cash and cash equivalents of $96 billion, significantly exceeding its debt of $11 billion. The advertising segment continues to generate substantial free cash flow, providing Alphabet with the means to invest in growth opportunities, including its cloud services and AI initiatives.

Despite its strong position, Alphabet faces medium uncertainty due to potential regulatory scrutiny regarding antitrust issues in the AI-driven search market. While it is unlikely that Alphabet’s market dominance will wane significantly, the prospect of regulatory changes introduces an element of unpredictability.

In summary, Alphabet’s third-quarter report reflects a company well-positioned for future growth, particularly through its advancements in AI and cloud computing. The raised fair value estimate and ongoing financial strength suggest that Alphabet remains a strong player in the technology sector.