VALUATION HIGHLIGHTS

1. Advertising (Google Search and Other, YouTube Ads, Network Members Properties) constitutes 65% of the Trefis price estimate for Alphabet Inc.'s stock.
2. Google Cloud constitutes 20% of the Trefis price estimate for Alphabet Inc.'s stock.
3. Other Revenues & Bets constitute 9% of the Trefis price estimate for Alphabet Inc.'s stock.

WHAT HAS CHANGED?

GOOG Stock Performance

GOOG stock has seen extremely strong gains of 100% from levels of $85 in early January 2021 to around $170 in early November 2024, vs. an increase of about 50% for the S&P 500 over this roughly four-year period.

However, the increase in GOOG stock has been far from consistent. Returns for the stock were 65% in 2021, -39% in 2022, and 59% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that GOOG underperformed the S&P in 2022.

Latest Earnings

The company posted total revenues of $88.3 billion in Q3 2024 — 15% more than the previous year's figure. It was mainly driven by growth in Google Cloud and Google Advertising segments. The bottom line stood at $2.12, versus $1.55 in the prior-year quarter.

In FY 2023, the company reported revenues of $307.4 billion, up 9% y-o-y. It was mainly driven by growth in Google Services and Google Cloud units. Further, operating Margin increased to 27%, and Operating Income was recorded at $84.3 billion. Earnings for the year (diluted) were recorded at $5.80, down from $4.56 in the previous year.

Impact of Coronavirus

IT software and Services industries suffered at the start of the pandemic from a fall in demand for software and web services as consumers focused more on essentials, not discretionary products. That said, the industry saw companies with a portfolio of software and services aimed at remote collaboration benefit due to the growing number of people working from home. As a result, Google's revenues saw significant growth in 2021. However, the growth slowed in 2022 and 2023 due to the tough macroeconomic scenario.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Alphabet's value that present opportunities for upside or downside to the current Trefis price estimate for Alphabet:

Alphabet's Google Search Ads

• Google Search Ads Revenues: Google continues to lead the search market with an estimated market share of over 90% in 2023. As the company improves its in-app search with deep links, Google revenues from mobile search will improve. We currently project search ad revenues to grow to $342 billion by the end of the forecast period.


• Google Search EBITDA Margin: We currently forecast Google's Search EBITDA margin to be around 40% by the end of the Trefis forecast period. Historically, Google's main operating cost component has been traffic acquisition costs (TAC). We believe that investments to allay privacy-related concerns, the growth rate of TAC, and employee compensation relative to revenues will pressure its margins.

For additional details, select a driver above or select a division from the interactive Trefis split for Google at the top of the page.

BUSINESS SUMMARY

Google.com and Google's international sites (e.g., Google.ru, Google.com.br, and others) offer a dedicated platform to conduct searches on the Internet through PCs and wireless devices.

Google makes money from contextual advertising, known as keyword advertising, that is shown based on the type of search a user conducts. For example, a user searching for "NYC restaurants" would be shown several ads on the right-hand side of Google's search results about restaurants and food services in New York City.

Advertisers on Google bid for keywords (such as "NYC restaurants") to display their advertisements on the Google search page. Google AdWords allows these advertisers to display advertisements in Google's search results and the Google Content Network through either a cost-per-click or cost-per-view scheme. The pricing of keywords, the inventory of keywords available, and the frequency of user search impact how much money Google makes on search.

In addition to advertising on its search engine, Alphabet makes money by placing advertisements on other Google-owned properties such as the video-sharing site YouTube, email service Google Mail (Gmail), etc. Alphabet also makes money by facilitating the placement of advertising on its "partner" websites (via the ad-serving platform AdSense), from which it receives a share of the advertising revenue.

Google search on mobile is increasingly gaining importance as more and more users are shifting towards mobile devices like smartphones and tablets for desktop-based web browsing.

SOURCES OF VALUE

We believe Google Search Ads division is much more valuable than Ad Partnerships for Search & Content, YouTube, Gmail, and other divisions of Alphabet due to the following reasons:

Google Dominates Web Search on a Global Scale

Alphabet's flagship search business, Google, continues to dominate globally. The company's superior algorithms and brand recognition have found favor with users, and to date, the search engine market has not boasted of a better search tool. Given the current trends, Google's dominance is expected to continue, although one cannot discount technologies such as Apple's Siri as possible future threats.

Growing Internet Searches per PC in Use

As web penetration increases across emerging markets like India, users are expected to become increasingly familiar with and comfortable using web search as the flagship tool to look for information. In addition, web browser development has made it easier to do a web search promptly. For example, Google Chrome obviates the need to open the Google homepage to perform a search. The above factors should contribute significantly to growing global web searches for every PC device.

Smartphone and Tablet Usage on the Rise

The mobile revolution would have a significant role in how Google search is utilized. Smartphone and tablet capabilities are improving by leaps and bounds. This includes personal usages such as finding restaurants and utilizing maps and GPS (Global Positioning System) and professional uses such as sending/receiving emails and making presentations. As bandwidths increase in emerging markets, mobile device functionality is expected to match PCs in the coming years. This should lead to a substantial increase in mobile devices in use globally.

KEY TRENDS

Growing Mobile Search

We expect increasing adoption of Internet search-capable mobile phones, higher mobile Internet speeds, and growing partnerships between search engines and mobile phone manufacturers (e.g., think Google search on iPhone). Google's open-source mobile OS, Android, should greatly benefit from this, using Google search as the default option. Android also has the advantage of being used by multiple manufacturers, including Samsung, LG, HTC, and most Chinese vendors.

Increasing Video Advertising

In contrast to search, which is more functional and commercial, online video and social networking are more entertainment-focused, whereas ads are generally seen as a distraction. Currently, advertisements displayed on such platforms are graphical and static, which does not drive the same recall as a moving video (e.g., television ads). As YouTube and other video-sharing sites figure out better ways of displaying ads that are not intrusive and do not interfere much with the user experience, advertisers will be willing to pay more for such ads, driving up overall video advertising monetization.