ALPHABET
Raunak Onkar, fund manager and head of research, PPFAS
Alphabet is a holding company which is the owner of Google, their largest and most profitable subsidiary. Google generates up to 85% revenue from its digital advertising business and the rest from their cloud computing, hardware, subscriptions and other services. They are also present in categories which will benefit from the technology adoption and digital advertising trends.
Some of Google's products like Android, Gmail, Youtube, G Suite and Chrome have over 1 billion monthly active users, each. It is a great platform for advertisers to meet consumers via targeted advertising.
The rest of the subsidiaries under the Alphabet umbrella are not very valuable at the moment but provide investors with some optionality on their outcomes. The separate subsidiary structure provides separation of capital allocation which is positive from a shareholder perspective.
Ali Mogharabi, Morningstar senior equity analyst
- Economic Moat: Wide
- Economic Moat Trend: Stable
- Fair Value: $1,400
- Fair Value Uncertainty: High
- Stewardship Rating: Standard
Alphabet holds significant intangible assets related to overall technological expertise in search algorithms and machine learning, as well as access to and accumulation of data that is deemed valuable to advertisers. Google’s brand itself is a significant asset, as “Google it” has become eponymous with searching, and regardless of actual technological competency, the firm’s search engine is perceived as being the most advanced in the industry.
Alphabet’s network effects are derived mainly through its Google products such as search, Android, Maps, Gmail, YouTube, and more. Google has the world’s most widely used search engine, and such a large and growing user base has created a network difficult to replicate. YouTube benefits from a network effect that creates value for users, content creators, and advertisers.
Our uncertainty rating for Alphabet is high, the result of high dependency on continuing growth in the online advertising space, along with questions as to whether the company’s moonshot investments will bear fruit. While we remain confident that Google will maintain its dominant position in the search market, a long-lasting downturn in online ad spending could have a negative impact on Alphabet’s revenue and cash flow, resulting in a lower fair value estimate. While Alphabet is facing a decline in online ad spending due to the COVID-19 pandemic, we think the impact will be for only 12-18 months, after which the firm will again benefit from the growing online ad market. On the other hand, positive returns on Alphabet’s investments in moonshots could increase the company’s fair value estimate considerably. These two factors support our high uncertainty rating.
