AI Advancements Will Drive Future Product Usage And Efficiency Across The Organization

Key Takeaways

• Alphabet's advancements in AI and strategic Google Cloud expansion are enhancing user engagement and driving robust revenue growth and improved margins.
  
• Waymo's global expansion and technological innovations are set to optimize costs and boost future revenue opportunities, improving net margins.
  
• Growing AI investments strain finances and infrastructure scaling challenges may hinder revenue, while AI reliance and competitive pressures risk market share and revenue.

Catalysts

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

• Alphabet's leadership in AI, including advancements in AI infrastructure and model development, is driving product usage and efficiency across the organization, setting the stage for future revenue growth and improved net margins.
  
• The expansion of AI capabilities in Search and the integration of features like AI Overviews and Circle to Search are expected to lead to increased user engagement and satisfaction, potentially boosting ad revenues and improving net margins.
  
• Alphabet's strategic expansion in Google Cloud, including growth in cloud regions, partnerships, and AI-powered solutions, is contributing to robust revenue growth and improved margins, with continued investment in infrastructure to meet increasing demand.
  
• The Gemini 2.0 model's advancements, along with experimental features like Deep Research and Project Mariner, are poised to expand Alphabet's ability to monetize AI innovations through increased adoption and potential premium services, boosting net margins and earnings.
  
• Waymo's international and domestic expansion plans, along with the development of a sixth-generation Waymo Driver, are likely to reduce costs and enhance future revenue opportunities, thereby positively impacting Alphabet's net margins and earnings.

Alphabet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alphabet's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.6% today to 28.7% in 3 years time.
• Analysts expect earnings to reach $137.4 billion (and earnings per share of $11.86) by about March 2028, up from $100.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, up from 19.6x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 19.2x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Alphabet Future Earnings Per Share Growth

Risks

• The significant increase in AI-driven capital expenditures, especially in infrastructure like servers and data centers, could pressure financial resources and impact net margins.
  
• The company's dependency on continued AI advancements and integration across products suggests a reliance on the technological success of AI, which if not achieved, could slow revenue growth.
  
• Potential challenges in scaling infrastructure quickly enough to meet AI demands could constrain revenue opportunities, especially in Google Cloud, which has shown demand exceeding available capacity.
  
• Competitive pressures from other AI agents and consumer applications could dilute Alphabet’s market share in Search and advertising, impacting overall revenue.
  
• The strategic focus on new markets, such as expanding Waymo and international AI operations, presents execution risks that could result in unforeseen costs or less-than-expected earnings.

Valuation

• The analysts have a consensus price target of $217.936 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 $151.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $479.5 billion, earnings will come to $137.4 billion, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 7.4%.
• Given the current share price of $160.67, the analyst price target of $217.94 is 26.3% 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.