We came across a bearish thesis on Alphabet Inc. (GOOGL) on Kroker Equity Research’s Substack by Kroker Equity Research. In this article we will summarize the bulls’ thesis on GOOGL. Alphabet Inc. share was trading at $154.69 as of Sept 12th.
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Alphabet Inc., the parent company of Google, is a global leader in digital products and platforms. The company operates through three main segments: Google Services, Google Cloud, and Other Bets. Google Services includes products such as Search, YouTube, Android, and Gmail, which are integral to Alphabet’s dominance in the digital world. Google Cloud has also made significant strides, transitioning from an operating loss in 2021 and 2022 to profitability in 2023, largely driven by revenue growth and reduced depreciation expenses from changes in the estimated useful life of servers and network equipment. With this turnaround, the Cloud segment is now expected to contribute significantly to Alphabet’s financial performance in the future, as outlined by management in the Q1 2024 earnings call.
Financially, Alphabet is exceptionally profitable and debt-free, generating substantial free cash flow while continuing to invest heavily in infrastructure, particularly for AI applications. Despite the large capital expenditures, Alphabet’s profitability has improved, with its return on invested capital (ROIC) reaching 29% in Q1 2024. The company has also been actively repurchasing shares, with significant buybacks authorized and executed in recent years, although a substantial portion of these repurchases offsets dilution from stock-based compensation.
Alphabet’s growth potential is also supported by YouTube, a standout platform that captures nearly 10% of U.S. screen time. YouTube has expanded significantly, with ad revenues reaching $31.5 billion in 2023 and a growing base of over 100 million Music and Premium subscribers. This growth underscores YouTube’s critical role in Alphabet’s strategy and its future profitability prospects.
Alphabet’s heavy investment in AI is another key aspect of its growth strategy. The company is integrating AI capabilities across its products and services, although it currently lags behind competitors like OpenAI and Microsoft. Nonetheless, Alphabet is confident in the long-term opportunities that AI presents. The company’s plans to acquire Wiz, a cybersecurity startup, for $23 billion further indicate its commitment to strengthening its cloud business, enhancing its competitive position against larger rivals like AWS and Microsoft Azure.
While Alphabet’s financial performance and market leadership suggest a compelling investment case, its valuation remains a point of concern. A discounted cash flow (DCF) analysis suggests the stock may be overvalued at its current price of $177 per share, even under optimistic scenarios. Although Alphabet is an exceptional business with strong growth prospects, potential investors must consider the risk of overpaying, even for a company of this caliber.
Alphabet Inc. is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 216 hedge fund portfolios held GOOGL at the end of the second quarter which was 222 in the previous quarter. While we acknowledge the risk and potential of GOOGL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GOOGL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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