From Morningstar: 2024-10-30 08:24:04

Alphabet’s third-quarter sales grew 15% year over year to $88 billion, led by strong advertising and cloud revenue. Profitability improved, with EBIT margins up 450 basis points to 32%. Concerns around antitrust and Alphabet being an AI laggard have made investors wary of future growth.

Search advertising sales rose 12% year over year, with encouraging AI Overviews feedback on user engagement and ad clicks. Google Cloud exceeded estimates, with sales up 35% to $11 billion. AI-related workloads continue to drive demand and are expected to sustain growth.

Alphabet’s fair value estimate is raised to $220 per share from $209 due to strong performance. SOTP valuation reveals $237 per share with Google Search accounting for half the enterprise value. Antitrust case against Google Search is significant, with DOJ expected to recommend divestiture of Android and Chrome in 2024.

Total advertising sales increased 10% to $66 billion, including strong growth in YouTube ads at $9 billion. AI Overviews impact on user engagement and ad clicks is positive. YouTube’s subscription business adds to annual revenue, expected to grow alongside video advertising and subscriptions over the next five years.

Monetization through digital advertising is seen as the path forward for search engines, as seen with Neeva’s failure to gain traction. Google Search’s continued AI innovations and brand trust give it a competitive edge over AI search alternatives. Google’s focus on AI-first search and monetization strategies are expected to drive growth.

Google Cloud’s growth and increasing profitability make it a long-term value driver for Alphabet. Spending on generative AI and public cloud are complementary goods, with downward pricing pressure driving increased usage. Public cloud vendors, including Alphabet, are investing in AI training models to drive down costs and increase adoption.



Read more at Morningstar: Alphabet Beats Estimates on Strong Search and Cloud…