AI Cloud And Waymo Services Will Expand Future Capabilities

Key Takeaways

• Alphabet's strategic focus on AI advancements and infrastructure improvements enhances operational efficiency and positions the company for increased revenue and net margins.
  
• Growth in subscription services and Google Cloud signifies strong scalable revenue streams, with potential long-term diversification through Waymo and innovative advertising tools.
  
• Fixed expenses and increased depreciation may pressure profitability, with revenue growth challenges in advertising and cloud segments potentially impacting earnings stability amidst changing economic conditions.

Catalysts

Offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America.

• Alphabet's focus on AI advancements, such as the rollout of Gemini 2.5 and improvements in AI infrastructure, suggests enhanced capabilities in their products and operations, potentially leading to increased revenue and improved net margins through efficiency gains.
  
• The growth of subscription services like YouTube and Google One, amassing over 270 million subscriptions, indicates a strong revenue stream with high potential for scalability and improved earnings due to the predictable revenue model.
  
• Significant demand for Google Cloud, driven by their leadership in AI, infrastructure, and innovative solutions like Vertex AI platform, could bolster future revenue and operating income through enhanced service offerings and customer acquisition.
  
• The expansion and development of Waymo, with a fivefold increase in paid passenger trips, coupled with new city launches, signify potential long-term revenue growth and diversification beyond traditional advertising.
  
• Strategic investments in AI-powered tools for advertising have shown a positive impact on customer performance, potentially leading to stronger advertising revenue growth and improved operating income as businesses optimize their advertising spend on Google's platforms.

Alphabet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alphabet's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.9% today to 29.0% in 3 years time.
• Analysts expect earnings to reach $140.1 billion (and earnings per share of $12.15) by about April 2028, up from $111.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $116.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, up from 17.5x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 1.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Alphabet Future Earnings Per Share Growth

Risks

• Advertising revenue in 2025 is expected to be impacted by the challenge of lapping the strong performance observed in the financial services vertical during 2024, posing potential risks to Google's revenue growth.
  
• The cloud segment may experience variability in revenue growth rates due to the timing of new capacity deployment, indicating supply constraints that could affect revenue predictability.
  
• Depreciation costs are expected to accelerate due to increased investments in technical infrastructure, potentially impacting net margins by increasing operating expenses.
  
• A forecasted 31% year-on-year growth in depreciation expenses could pressure profitability, despite efforts to offset through operational efficiencies, potentially affecting earnings.
  
• If the macroeconomic environment deteriorates, there may be limited flexibility to adjust CapEx investments and other fixed expenses, which could hinder reaction speed to declining economic conditions, impacting earnings stability.

Valuation

• The analysts have a consensus price target of $202.121 for Alphabet based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $240.0, and the most bearish reporting a price target of just $160.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $484.0 billion, earnings will come to $140.1 billion, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $160.16, the analyst price target of $202.12 is 20.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.