Alphabet Inc (NasdaqGS: GOOGL) Intrinsic Valuation
Alphabet Inc. will continue to sustain healthy growth in advertising and subscriptions. Investments in AI technology will continue to persist in the foreseeable future. Also, the company will continue to recalibrate its cost structure for further efficiency. There will be significant increases in CapEx investment which is expected in 2024. Alphabet’s X division will be spinning out more projects into independent companies.
In the latter part of 2023, Alphabet’s ad business made a sudden recovery due to a reduction in inflation and various restructuring moves. We expect improvements in Alphabet’s ad business to continue throughout 2024. Alphabet has built a highly reliable business with substantial market share in advertising which makes it vulnerable to the shifts of the economic environment, nevertheless, this will not affect growth over the long term.
Alphabet has demonstrated a double-digit Compound Annual Growth Rate (CAGR) in revenue over the past four years. The pre-tax Operating Margin has been consistently over 30%. However, Alphabet faces stiff competition in growing its services and cloud revenues.
Alphabet has huge earning potential in Generative Artificial intelligence (AI). Alphabet has bolstered investment in AI in 2023. As of now, Alphabet has nine products with over a billion users such as Youtube, Android and many platforms under Google which present unlimited number of possibilities to monetize its AI venture.
However there have been challenges in AI Development such as the Gemini image launch. The Gemini image launch was problematic, highlighting the issue of Model Hallucination common in current Large Language Models (LLMs). Efforts are underway to mitigate model bias, prejudices, and hallucination effects. Future LLMs are expected to be thoroughly tested and improved.
In terms of investment outlook, there is optimism about Google’s growth potential as a long-term investment. Alphabet’s current valuation is seen as an attractive investment opportunity.
Our intrinsic valuation of Alphabet Inc (NasdaqGS: GOOGL) under three CAGR Revenue scenarios yield the following fair value estimates:
• CAGR of 7.02% is $123
• CAGR of 9.48% is $146
• CAGR of 11.92% is $176
Attached below is the valuation summary: