In this stock analysis we will learn everything about the Alphabet share. We will analyze Alphabet’s profitability, financial security & growth and in the end we will evaluate the share price. You can then decide whether Alphabet is a suitable investment for you or not.
Company profile
Alphabet Inc. is a US multinational technology conglomerate based in Mountain View, California. The company was founded in October 2015 through a reorganization of Google and has since been the parent company of Google LLC and various other subsidiaries.
Alphabet is divided into two divisions:
Google: Alphabet’s largest division comprises the company’s core businesses, such as the Google search engine, online advertising, the cloud computing platform Google Cloud Platform and the Android operating system.
Other Bets: This division includes Alphabet’s innovative businesses, such as the self-driving car company Waymo, the life sciences company Verily and the hardware company Nest.
Alphabet is one of the largest and most valuable companies in the world. In 2023, the company generated a turnover of 257.6 billion US dollars with a profit of 76.8 billion US dollars.
Revenue Distribution – Alphabet
Alphabet’s revenue is divided as follows:
- Google: 246.8 billion US dollars (96.2 %)
- Other Bets: 10.8 billion US dollars (3.8 %)
The Google division is the most important source of revenue for Alphabet. It comprises the following products and services:
- Google Search: The world’s leading search engine
- Google Ads: The largest platform for online advertising
- Google Cloud Platform: A platform for cloud computing services
- Android: The world’s most widely used mobile operating system
The Other Bets division includes Alphabet’s innovative businesses, such as
- Waymo: A self-driving car company
- Verily: a life sciences company
- Nest: A smart home appliance company
- CapitalG: An investment fund for external companies
The Other Bets division is still in the growth phase and therefore only contributes a relatively small proportion of Alphabet’s revenue.
Revenue Distribution – Google
Google’s revenue is broken down as follows:
- Google Ads: 224.4 billion US dollars (91.2 %)
- Google Cloud Platform: 16.2 billion US dollars (6.7 %)
- Android: 6.2 billion US dollars (2.3 %)
Google Ads is the most important revenue driver for the company. It is the largest platform for online advertising and generates the majority of Alphabet’s revenue.
Google Cloud Platform is a cloud computing service that helps companies modernize their IT infrastructure. The Google Cloud Platform business is growing strongly and is making an increasingly large contribution to Google’s revenue.
Android is the world’s most widely used mobile operating system. It generates a relatively small part of Google’s revenue, but it is important for the company as it is the basis for many other Google products and services.
Alphabet’s revenue distribution is likely to shift further towards the cloud computing division in the future. The cloud computing market is growing strongly and Alphabet is a major player in this area.
In 2023, the cloud computing division accounted for $16.2 billion in revenue, which was around 6% of Alphabet’s total revenue. Analysts expect this share to increase further in the coming years.
Alphabet’s online advertising revenue is likely to continue to develop positively in the future. The market for online advertising continues to grow, and Alphabet is the market leader in this area.
Competition
Alphabet’s biggest competitors are:
- Meta Platforms (Facebook): Meta is a social media company that operates the Facebook, Instagram and WhatsApp platforms. Meta is an important competitor of Alphabet in the areas of online advertising and social media.
- Amazon: Amazon is an e-commerce company that also offers cloud computing and streaming services. Amazon is a major competitor of Alphabet in cloud computing and online advertising.
- Microsoft: Microsoft is a software company that also offers cloud computing and hardware products. Microsoft is a major competitor of Alphabet in cloud computing and operating systems.
- Apple: Apple is a technology company that manufactures smartphones, tablets, computers and other devices. Apple is a major competitor of Alphabet in mobile operating systems and hardware.
These companies compete with Alphabet in the following areas:
- Online advertising: Alphabet is the market leader in online advertising. Meta and Amazon are other important players in this area.
- Cloud computing: Alphabet is a major player in the field of cloud computing. Amazon and Microsoft are also competitors in this area, all vying for market leadership.
- Operating systems: Alphabet is the developer of the Android operating system, which runs on over 70% of smartphones worldwide. Apple is the developer of the iOS operating system, which runs on over 20% of smartphones worldwide.
- Hardware: Alphabet manufactures smartphones with Google Pixel. Apple is the market leader in the smartphone sector and in many other hardware products.
The competition between Alphabet and its competitors is intense. Alphabet is fighting for market share and customers with the largest and most influential companies in the world.
Profitability – Alphabet Inc
The first analysis to determine the intrinsic value is profitability.
Stocks with a competitive advantage generate high profit margins, do not require a lot of capital and stand out from the competition. In other words, stocks with a competitive advantage are more profitable than the competition.
To determine this, we first look at the income statement, analyze it, compare the profit margins with the competition and calculate how capital-intensive the business is compared to the competition.
To do this, we take a closer look at the income statement and start by analyzing how much revenue was generated, what costs accrued and what profit were achieved as a result. Here is the income statement stream from Alphabet:
Alphabet generated revenues of around $297 billion in the last four quarters, with a cost of revenue of around $131 billion. The approximately $87 billion in operating expenses are made up equally of administrative and research & development costs. The non-operating costs are marginal and have no impact on profits. After taxes, Alphabet generated a profit of $66.7 billion.
Profit Margins
The various margins are of particular interest in the income statement analysis. The higher the margins compared to the competition, the greater the competitive advantage. The emphasis here is on competitive comparison, as companies from the automotive industry cannot be compared with technology companies such as Alphabet. A comparison only makes sense if the products and services are comparable.
Alphabet achieves slightly lower margins than its competitors:
| Alphabet | Meta (Facebook) | Microsoft | Apple | |
| Gross Margin | 55,88% | 79,05% | 69,44% | 44,13% |
| Operating Margin | 26,51% | 28,96% | 43,01% | 29,82% |
| Net Profit Margin | 22,46% | 23,42% | 35,31% | 25,31% |
Margins from the income statement give us an indication of the profitability of a company. Basically, it can be said that the better the margins compared to the competition, the higher the profitability and the greater the competitive advantage.
However, as already mentioned, the products and services must be comparable with each other. Even if there are many overlaps in this competitive comparison, they are all unique and a comparison should only be made with caution. As a rule of thumb, it can be said that operating margins of 20% or more and net profit margins of 15% or more are good.
Return on Assets
Return on assets (ROA for short) is the most important key figure for analyzing a company’s profitability. ROA is calculated by dividing the profits by the total assets. It shows how much profit a company generates from its assets. The higher the ROA compared to the competition, the better the company’s earning power.
An example to illustrate this: Let’s assume you have $500,000 to buy a rental apartment. You can choose between two apartments: The first apartment costs $500,000 and brings in $12,000 in rental income per year. The second apartment also costs $500,000 and brings in $18,000 in rental income per year.
The ROA for the first apartment is 2.4 % and 3.6 % for the second apartment. This means that you generate more income from your invested capital with the second apartment.
Here is the ROA comparison between Alphabet and its competitors:
| Alphabet | Meta (Facebook) | Microsoft | Amazon | Apple | |
| ROA | 17,82% | 15,29% | 19,65% | 4,33% | 28,21% |
As already mentioned, the comparison is very complex, as only similar products and services can be compared with each other. Alphabet, which generates the most revenue through online advertising, would have to be compared with companies that also generate the most revenue through online advertising. Accordingly, the comparison of Alphabet’s ROA with Meta is the most meaningful.
Financial Security – Alphabet Inc
After analyzing the profitability, the second analysis for determining the intrinsic value is the financial security of a company. This is because companies that are financially secure and solidly financed give us investors a level of security. While the income statement provides us with information about the operating business, the balance sheet shows us how the company is financed.
To assess the financial security of a company, it is important to look at the ratio between equity and debt. In addition, the company should be able to cope with short-term financial burdens. The debt to equity ratio and the cash ratio are two key figures that can help us with this.
The debt to equity ratio shows the relationship between long-term debt and equity. The cash ratio shows how well short-term liabilities are covered by cash, bank and similar assets. Here is the development of the mentioned KPIs for Alphabet:
| Cash Ratio | Debt to Equity | |
| 2019 | 2,65 | 0,08 |
| 2020 | 2,41 | 0,12 |
| 2021 | 2,17 | 0,11 |
| 2022 | 1,64 | 0,12 |
This means that current liabilities are very well covered and the company is largely self-financed. This is a strong indicator of high financial security. To put financial security into perspective, here is a comparison with the competition:
| Alphabet | Meta (Facebook) | Microsoft | Amazon | Apple | |
| Cash Ratio | 1,64 | 1,52 | 1,07 | 0,96 | 0,42 |
| Debt to Equity | 0,12 | 0,21 | 0,29 | 0,45 | 1,79 |
As this comparison clearly shows, Alphabet has the highest level of financial security. Compared to its competitors, its current liabilities are the best secured and its debt-to-equity ratio is by far the lowest.
Growth – Alphabet Inc
Analyzing company performance is an important part of value investing. It makes it possible to draw conclusions for the future from the past. The income statement provides important information about the development of the company.
Here is the development of revenue, operating income and net income from 2019 to TTM:
In the period from 2019 to September 2023, Alphabet achieved a revenue increase of +84% with an operating growth of +119% combined with a profit increase of +94% to around $66.7 billion.
Alphabet’s growth compares very favorably with its competitors:
| 2019 to TTM | Alphabet | Meta (Facebook) | Microsoft | Apple |
| Revenue Growth | +84% | +79% | +73% | +47% |
| Operating Growth | +119% | +53% | +120% | +78% |
| Net Income Growth | +94% | +61% | +96% | +75% |
The development of KPIs can provide information about the future development of a company. Although past growth is no guarantee of future growth, companies with a strong performance will generally continue to grow in the future. Companies whose sales and profits are falling, on the other hand, will generally also fall in the future.
To make a more accurate forecast, you should also consider the distribution of sales in addition to the KPI development. Alphabet generates the most revenue from online advertising, followed by cloud solutions.
Share Price & Forecasts
Now that we have analyzed and evaluated the Microsoft share, it is time to assess the current price of the share.
The share price is determined by supply and demand. Supply is determined by the company and the shareholders. Demand is determined in the long term by the earnings per share. The more profit a share generates, the more interesting it is for investors.
The P/E ratio, also known as the price/earnings ratio, shows the relationship between the share price and the earnings per share. For example, a P/E ratio of 20 means that a share with a price of $20 has earnings per share of one dollar. (Price = P/E ratio * earnings per share)
The lower the P/E ratio, the better the investment. Unfortunately, this cannot be said across the board, as future developments and forecasts play a very important role. Let’s come back to our example:
We currently have a P/E ratio of 20 and an earnings per share of one dollar.
In the first scenario, we assume that the company will generate earnings per share of $3 next year and even more in the following years. The future prospects are therefore very good, and if this is the case, demand will probably increase.
The second scenario is exactly the opposite. Future expectations are poor and the company is expected to generate only $0.5 per share in the coming year and the following years do not look much better. Here, the share price of $20 is probably too high for many investors and demand is falling.
In the last scenario, it is expected that the company will no longer achieve growth and will remain at a profit of $1 per share in the coming years. The $20 is perhaps just the right price and a stable share for the future.
The various scenarios are purely hypothetical and only reflect reality to a certain extent. But the basic idea between earnings per share, P/E ratio and share price should have been well illustrated.
Earnings per Share – Alphabet
Let’s take a look at the development and forecasts for Alphabets earnings per share (EPS):
EPS of $5.9 is expected for 2023 and the expected values for 2024 and 2025 also mean a significant increase in earnings. With the base value of 2022, Alphabet would achieve an increase of +58% to 7.86$. Based on our analysis, this growth seems plausible. But earnings per share are only half the story, let’s look at the P/E ratio.
P/E Ratio Development – Alphabet
Here is the development of Microsoft’s P/E ratio from 2019 to TTM:
A P/E ratio of less than 20 is considered undervalued, a P/E ratio of more than 25 is considered overvalued. Alphabet has a P/E ratio of 25.31. This would mean that the share is fairly valued.
Over the entire period, Alphabet’s average P/E ratio is around 27, which means that the stock is slightly overvalued. To arrive at a more accurate valuation, we should link the P/E ratio with EPS.
Share Price – Forecast
First of all, we link the EPS forecasts with Alphabet’s P/E ratios. In the first scenario, we assume that demand for Alphabet shares will remain the same over the next few years. This would result in the following share price forecasts:
| Year | EPS-Forecast | P/E Ratio | Share Price – Forecast |
| 2023e | 5,9$ | 27 | 159$ |
| 2024e | 6,67$ | 27 | 180$ |
| 2025e | 7,86$ | 27 | 212$ |
Alphabet’s share price is currently $138.34 (as of 12/21/2013). Based on this scenario, Alphabet’s share price performance looks very good. To be precise, an increase in value of around 53% by 2025.
In a second scenario, we expect demand to be conservative, so we assume a P/E ratio of 20-25, which can generally be considered fair.
| Year | EPS-Forecast | P/E Ratio | Share Price – Forecast |
| 2023e | 5,9$ | 20-25 | 118$ – 147$ |
| 2024e | 6,67$ | 20-25 | 133$ – 166$ |
| 2025e | 7,86$ | 20-25 | 157$ – 196$ |
Alphabet would also experience a solid increase in value in this scenario. In this case, however, “only” by 13-41%.
I would not recommend a third scenario with rising demand, because you should always allow for a margin of safety when making forecasts, as the future is uncertain.
Summary
Alphabet generates most of its revenue through Google, especially through online advertising and the Google Cloud platform. Other business areas do not have a major impact on the company.
Alphabet is one of the largest and most valuable companies in the world. In 2023, the company generated a turnover of 257.6 billion US dollars with a profit of 76.8 billion US dollars.
Quantitative analysis
The quantitative analysis of Alphabet shows that the company has strong financial security. The company generates high revenues and profits, which have increased steadily in recent years. Alphabet’s margins are slightly lower than those of its competitors, but still in a good range.
Share price & forecast
Based on the quantitative and qualitative analysis of Alphabet, it can be concluded that the company’s shares are a solid investment. The forecasts for Alphabet’s share price are positive. In a scenario with constant demand, the share price would rise by around 53% by 2025. In a conservative demand scenario, the share price would rise by 13%-41% by 2025.
Alphabet is a solid investment with positive future prospects. In my opinion, the company’s shares are currently undervalued and offer great potential for price gains. But what do you say?
Disclaimer
This article is not financial advice and does not constitute a recommendation to buy or sell stocks. The information in this article is based on the personal opinions of the author and should not be construed as investment advice.
The author assumes no liability for any damages resulting from the use of the information in this article. Readers should inform themselves independently before investing in stocks and only make an investment decision after their own examination. An investment in shares can lead to a total loss of capital.
All figures on Alphabet and the share are from Gurufocus.
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