Alphabet Inc. – AI underpinning ad growth




The Positives

+ Advertising continued to rebound; growth improved sequentially. Ad revenue in 4Q23 improved sequentially vs 3Q23 (9% YoY) to US$65.5bn (11% YoY), driven largely by Search (+13% YoY) and YouTube Ads (16% YoY). Retail strength in APAC was the standout, with small and medium businesses GOOGL’s fastest-growing channel. AI technology in products like Performance Max and Search Generative Experience continues to also drive higher conversions per dollar for advertisers, and incremental query growth from consumers. We expect AI to continue driving most of the gains in advertising by creating: 1) increasing ROI and value for advertisers; and 2) wider accessibility for customers like SMBs.


+ Monetisation on YouTube improving, with subscription momentum gaining traction. Continuing on from previous quarters, Shorts monetisation has been progressing well as viewership expands. Shorts currently has ~2bn MAUs and ~70bn average daily views. YouTube Music and Premium subscriptions are also scaling well, with an annualised run rate of US$15bn. The first season of NFL Sunday Ticket was the key driver for subscription growth. Although still a very small portion of its business, we anticipate ~20-25% YoY subscription growth in FY24e given the growing user base of YouTube on connected TV.


The Negative

- Significantly increasing FY24e CAPEX for servers and data centres to support AI work. GOOGL ended 4Q23 with US$11bn in CAPEX, a 45% YoY increase. It also expects “notably larger” levels of CAPEX in FY24e as it remains focused on developing its technical infrastructure (servers and data centres) to support AI development. We are modeling for a ~20% YoY increase in CAPEX for FY24e vs our previous estimates of ~6% YoY.

Alphabet Inc. – Showing signs of recovery



The Positives

+ Advertising looks to have bottomed. GOOGL showed some signs of recovery in its advertising business, with US$58bn in ad revenue expanding 3% YoY after 2 consecutive quarters of contractions. Within advertising, Search revenue re-accelerated slightly to 5% YoY (1Q23: 2% YoY) on the back of better retail advertising trends, with revenue from YouTube also accelerating to 4% YoY (1Q23: -3% YoY) after 3 quarters of negative growth – indicating that at the very least we are starting to see some stabilisation in advertising spend. Ad growth is expected to continue accelerating into 2H23e given an increase in advertising activity, and easier comps vs 2H22.


+ Cloud showing healthy growth in the face of moderating consumption. Google Cloud showed resilient growth in the face of slowing cloud consumption trends. Cloud revenue increased 28% YoY to US$8bn with growth in both seats and average revenue per seat. Additionally, Cloud saw extensive customer interest in its AI-related products like Bard and Duet AI. Operating income for the segment was US$395mn (5% operating margin), its 2nd consecutive quarter of profitability.


+ Earnings grew for the first time in 5 quarters. With re-accelerating topline growth, a sharp reduction in total expenses, and restructuring charges behind them, GOOGL finally posted earnings growth after 5 consecutive quarters of declines. PATMI of US$18.4bn grew 15% YoY, with net margin of 24.6% expanding by 2%/3% YoY/QoQ as a result. As AI drives improvements in efficiency and productivity, we continue to expect margins to improve moving forward – FY23e PATMI is increased by 4%, with net margin of 24.4% (1H23: 23.1%).


The Negative

- Nil.

Alphabet Inc. – Resilient growth, Cloud profitability



The Positives

+ Revenue growth re-accelerated slightly due to advertising revenue. GOOGL saw a re-acceleration in revenue growth, posting total revenue of US$69.8bn, 3% YoY (4Q22: 1%). Growth was driven by a 2% YoY increase in advertising revenue from Search (4Q22: -2% YoY) as spending from its travel and retail verticals improved. Additionally, ad revenue from YouTube showed some signs of stabilisation, declining only 3% YoY (4Q22: -8% YoY) as YouTube Shorts monetization increased, offset by some incremental pullback in advertiser spend.


+ Google Cloud momentum slowing, but turned the corner on profitability. Cloud saw some slowdown in its growth momentum, with revenues up 28% YoY (4Q22: 32% YoY). This was led by a continued weaker macro environment, with customers choosing to optimise their current Cloud consumption instead of expanding. Even with topline growth slowing, Cloud posted its first profitable segment, with operating income of US$191mn (1Q22: US$706mn) – operating margin of 2.6%, as management remained focused on driving longer-term profitability in this segment.


+ Earnings in-line with our forecasts. GOOGL announced 1Q23 PATMI of US$15.1bn, in line with our expectations as the company continued to be more prudent with expenses. Earnings were hurt by a US$2.6bn one-off restructuring related charge, offset positively by a US$1bn reduction in depreciation expenses due to an increase in estimated useful life of servers and other equipment, and a delay in timing of its stock-based compensation. 1Q23 PATMI was at 21% of our FY23e forecasts, with Adj. PATMI (excl. restructuring charges) at 24% of our forecasts.


The Negative

- Cautious FY23e outlook. Given the ongoing uncertainty in the macro environment, management remained cautious for the remainder of FY23e, expecting advertising revenue growth to remain muted, with continued decline in Cloud momentum.

Alphabet Inc. – Focused on reducing expense base

The Positives

+ Google Cloud momentum still strong, with profitability in focus. Cloud remained GOOGL’s fastest growing segment, increasing 32% YoY to US$7.3bn as customers continue to leverage on Cloud’s AI/Infrastructure/Cybersecurity offerings. Cloud continues to operate in the red, with a 4Q22 operating loss at -US$480mn, although management spoke about its focus on making Cloud profitable sooner rather than later.

+ Slowing expense growth guided moving forward; FY23e CAPEX in line with FY22. Management remains committed to slowing expense growth moving forward; guiding FY23e CAPEX to be at similar levels with FY22 as it consolidates office facilities, offset by continued investments in tech infrastructure. GOOGL also announced the reduction of around 12,000 jobs (~6% of workforce) in 1Q23e as it looks to reduce some of its fixed costs, and will remain prudent and more selective when making investment decisions. FY23e operating margins are still expected to remain relatively similar compared with FY22 at around 27% due to consolidation and severance-related charges, but to expand more meaningfully in FY24e.


The Negative

- Headline earnings missed on weakness in advertising demand, inventory charges, and FX drag. 4Q22 revenue of US$76bn missed estimates marginally by US$440mn, dragged down by a 2% YoY decline in services (advertising) revenue; and a 6% FX headwind. Headline earnings also missed due to higher-than-expected inventory charges of US$1.2bn; and a US$1.5bn unrealised loss on debt/equity investments.

Alphabet Inc. – Challenged by pullback in advertising spend



The Positives

+ Continued momentum in Google Cloud. Cloud remained GOOGL’s fastest growing segment with 38% YoY growth in the quarter, and US$6.9bn in revenue. Growth continues to be driven by increasing cloud adoption and cybersecurity needs, as businesses look to reduce IT costs and digitalize.


The Negatives

- Revenue/earnings both miss on pullback in ad spend and FX drag. GOOGL posted revenue of US$39.1bn for the quarter, equating to a 6% YoY increase, its slowest revenue growth since 2013. Revenue was hurt by a 5% FX headwind, and a pullback in advertising spend due to an uncertain macroeconomic environment – particularly in the financial services vertical, with advertising revenue up only 3% YoY. Net margin was 20% for 3Q22, down almost 9% compared with 3Q21, hurt by increasing OPEX associated with headcount growth (26% YoY), and a US$3.5bn fluctuation in unrealized losses of equity/debt investments.


- FX drag to increase for 4Q22. The strengthening of the US dollar is expected to be an even larger headwind moving into 4Q22, with a greater impact on bottom line growth compared to revenue (% of expenses incurred in US Dollar is higher than % of revenue). Revenue and earnings growth is also expected to be weak compared to a very strong 4Q21, adding to growth headwinds for the upcoming quarter.



We expect 4Q22 revenue growth to be around 6% YoY, mainly due to tough comparisons vs a very strong 4Q21 (Figure 1). An uncertain macroeconomic environment and continued strengthening of the US dollar is also expected to continue in the short term, which should present growth headwinds as well. GOOGL also said that 4Q22 headcount additions will be significantly less than 3Q22, as it continues to work on driving efficiencies by shifting resources away from lower priority opportunities, and focusing on bigger growth opportunities like AI technology.


YouTube Shorts continues to show great user momentum, with 1.5bn monthly active users, and 30bn daily views. Shorts viewership as a percentage of total YouTube watch time also continued to increase. GOOGL also lowered the barriers of entry to YouTube Partner Program and began a revenue sharing model for Shorts creators, increasing monetization and support for the creator ecosystem.


GOOGL continues to generate strong Free Cash Flow (FCF) – US$16.1bn for 3Q22, and about US$63bn for the trailing 12 months. The company also bought back slightly more than US$15.4bn worth of shares in the quarter

Alphabet Inc – Business resilient through macro uncertainty

The Positives

+ 2Q22 revenue in line with forecasts. GOOGL met consensus estimates for its top line, posting US$69.7bn in revenue, representing a 13% YoY increase (16% YoY in constant currency). Revenue growth continued to be supported by growth in GOOGL’s Services (10% YoY) and Cloud (36% YoY) segments. The company also remains on track to hit our FY22e revenue estimates of US$303.4bn, even amidst near-term FX headwinds that are expected to continue.


+ Cloud continues to push ahead. Cloud remained GOOGL’s fastest growing segment, with 36% YoY growth in the quarter, crossing US$6bn in revenue for the first time. Growth was driven by continued corporate demand across Google Cloud Platform and Google Workspace, as companies leverage on Google Cloud’s Artificial Intelligence, Machine Learning, and Cybersecurity capabilities to optimize and safeguard operations. GOOGL also remains focused on working towards profitability in its Cloud segment, reducing losses QoQ.


The Negatives

- Higher-than-expected unrealized losses in debt/equity investments hurting bottom line. GOOGL’s net margin contracted from 30% a year ago, to 23% this quarter, hurt by an almost US$4bn fluctuation in unrealized gain/loss on debt/equity investments. Taking out these fluctuations, net margin for 2Q22 would be 24%, compared to 26% in 2Q21. If we normalize PATMI (exclude Other Income), 1H22 would be 43% of our normalized FY22e PATMI forecasts.


- Weak macroeconomic outlook and strengthening FX headwinds to continue. Pullback in spending by some advertisers across all verticals and industries in 2Q22 continue to reflect uncertainty regarding a weakening macroeconomic environment, with these challenges expected to continue in 3Q22. Also, a strengthening US dollar led to a 3.7% growth headwind for 2Q22, and is expected to worsen in 3Q22 given the strong quarter-to-date performance of the US dollar so far.



We expect overall growth to be moderated compared to a particularly high growth period in FY21. Capital expenditure is expected to remain elevated as the company continues to invest in more servers and data centers. A weak macroeconomic environment and a strengthening US dollar is also expected to continue in the short-term, led by uncertainty over the severity of continued interest rate hikes and a possible recession.


Google Cloud continues to grow well, and we expect this to continue moving forward with increasing commitment from management to expand its scale and capabilities – increasing its focus on building up Artificial Intelligence, Machine Learning, and Cybersecurity technologies to support Cloud products. Corporate demand for Google Cloud’s products and services is also expected to remain resilient.


YouTube continues to see strong user engagement, with YouTube Shorts recording more than 30bn daily views, by over 1.5bn users each month. YouTube advertising continues to be an important tool for advertisers, with advertisers excited about YouTube’s reach and ability to drive results. YouTube is currently in its infancy stage as far as monetization, which we believe would be a huge additional driver of revenue growth moving forward.


GOOGL continues to generate strong Free Cash Flows (FCF) – US$12.6bn for 2Q22, and about US$65bn for the trailing 12 months. The company also bought back slightly more than US$15bn worth of shares – the most it has ever done in a single quarter, and also increased its share repurchase authorization for the year to US$70bn.


We reduce our FY22e PATMI forecasts by 10% on the back of higher-than-expected unrealized losses from debt/equity investments, and adjust total expenses forecast upwards slightly to account for increasing investments in IT.


Maintain BUY with a lowered target price of US$139.00 (prev. US$144.00)

We maintain a BUY rating with a lowered target price of US$139.00 (prev. US$144.00), with a WACC of 7.3%, and a terminal growth rate of 3.5%.

Alphabet Inc – Moderating growth, YouTube shorts usage surges


The Positives

+ 1Q22 revenue in line with our forecasts. GOOGL beat consensus estimates for its top line, and it was in line with our estimates, even with an estimated 1% loss in revenue due to a cessation of its ad services in Russia. Its US$68bn in revenue for 1Q22, representing a moderated YoY growth of 23%, continued to be supported by strength in GOOGL’s services and cloud segments.


+ Growth drivers still performing well. Cloud remained GOOGL’s fastest growing segment, with 44% YoY growth in the quarter, supported by a continued demand in both cloud cybersecurity, and cloud productivity applications. GOOGL also continued to see growth in total time spent on YouTube, with over 30 bn daily views on YouTube Shorts, more than 4x compared to a year ago. Monetization of YouTube Shorts is still in its infancy, which we believe should provide an additional boost to overall advertising revenue once fully monetized.


The Negatives

- Bottom line miss due to unrealized US$1.2bn loss of equity investments. GOOGL posted EPS of US$24.62, missing consensus estimates of US$25.91. PATMI for 1Q22 was US$16.4bn, a YoY decline of 8% compared with 1Q21. Net Margins for the quarter came in at 24%, compared with 32% in the same period last year. A big reason for this was an unrealized loss of US$1.2bn in equity investments for 1Q22 vs an unrealized gain of US$4.8bn in 1Q21. Removing Other Income from PATMI would give you US$17.6bn in 1Q22 vs US$13.1bn in 1Q21, a 34% YoY increase. Operating income grew in line with revenue, with operating margins roughly the same at 30%.



We expect slowing growth of around 18-20% YoY for 2Q22, slightly below 23% growth shown in 1Q22. A key reason for this is because 2Q21 saw 60% YoY growth over a very weak 2Q20 that was in the middle of the COVID-19 pandemic, and provides a particularly tough YoY comparison for 2Q22, and for the rest of FY22e as well. Also, headwinds from suspending most of the company’s commercial activities in Russia during the latter part of 1Q22 will continue to be present.


Google Cloud continues to grow well, and we expect this high growth of 40+% YoY to continue moving forward, especially as companies continue to rely heavily on cybersecurity, infrastructure, and platform services that Google Cloud provides.


The increasing popularity of YouTube Shorts can potentially be a source of additional revenue with effective monetization. We think that continued consumer preference for short-form videos should provide constant tailwinds for viewership metrics in this product.


Maintain BUY with an unchanged target price of US$3493.00

We maintain a BUY rating with an unchanged target price of US$3493.00, with a WACC of 6.6%, and a terminal growth rate of 3.5%.

Alphabet Inc – Another blowout quarter


The Positives

+ Continued strength in revenue growth. GOOGL had another standout quarter in terms of revenue growth, reporting US$75.3bn in revenue for 4Q21 – representing a 32% YoY increase. Overall revenue growth for the quarter was heavily supported by both Services, and Cloud segments, with growth of 31% and 45% respectively. The company also reported FY21 revenue of US$257.6bn – up 41% YoY, slightly above our estimates of US$253.3bn.


+ Advertising revenue continues to be an important revenue driver. GOOGL posted advertising revenue of US$61.2bn in 4Q21, a 33% YoY increase, representing 81% of total revenue for the quarter. Much of the advertising revenue growth was supported by increasing advertiser spend, coupled with an uptick in consumer online activity over the holiday season as consumers spent more time and money shopping online in the quarter. Advertising spend mainly came from the retail segment, with finance, entertainment, and travel also strong contributors.


+ Cloud continues to be GOOGL’s fastest growing segment. 4Q21 was another good quarter for GOOGL’s Cloud segment, growing 45% YoY, with revenue of US$5.5bn, and a US$51bn order backlog which should provide GOOGL with a stable source of Cloud revenue moving forward. We expect Cloud revenue to continue growing as the company continues to invest heavily in increasing server capacity to accommodate demand, as well as continued tailwinds from global digitalization trends, and the increased emphasis on cybersecurity.


+ GOOGL announces 20-for-1 stock split. GOOGL announced that its Board of Directors had approved a 20-for-1 stock split in the form of a one-time special stock dividend on each share of Class A, B, and C stock. This stock split is still subject to shareholders approval, and is scheduled to occur at the beginning of 3Q22 if approval is granted. We believe this could make the stock more attractive and accessible to retail traders and investors with a reduced stock price of around US$150 from ~US$3000.


FY21 performance was exceptional, with 41% YoY growth in revenue, and around 90% YoY increases in PATMI and EPS, led by net margins of almost 30%, compared to only 22% in FY20 (Figure 1).

ALPHABET INC. Growth engine with monopoly power


Company Background

Alphabet Inc. operates as a holding company with subsidiaries providing web-based search (Google), advertisements, maps, software applications, mobile operating systems (Android), consumer content (YouTube), enterprise solutions, commerce, and hardware products.


Investment Merits

  1. A monopoly with growth. Google monopolises online search with its 92% share. We continue to see GOOGL’s digital advertising revenue grow from strength to strength, led by the company’s immense global reach and a diversified product portfolio capable of capturing multiple consumer touch points. Macro shifts in trends towards more digital forms of advertising, as well as an increasing amount of digital transformation projects globally should provide tailwinds to support PATMI growth. Net margins are also expected to widen 8% by end FY22e, led by strength in verticals like digital advertising and cloud services which have high degrees of operating leverage.


  1. Commercialising YouTube as additional growth driver. YouTube is GOOGL’s fastest growing product, more than doubling revenue over the last 3 years to US$20bn FY20 (12% of total revenue). YouTube has been commercializing its services through digital ad placements on its platform, sharing a portion of its ad revenue with content creators, incentivising them to produce more content with the goal of attracting more users. This strategy has allowed YouTube to grow in scale and reach, with more than 2 million content creators, an estimated 2 billion monthly users, and over a billion hours of video watched daily. We expect YouTube revenue to continue growing at this rate and hit US$36bn by FY22e, led by strength in its advertising reach and effectiveness, and supported by increases in consumer preference for short-form, and on-demand video.


  1. Large growth potential in Cloud. Google Cloud has been the company’s fastest growing segment over the last 3 years, growing at a 3-yr CAGR of 48%, with revenue of US$13bn in FY20 (Figure 4). We expect this segment to continue its strong growth pattern and double revenue by end FY22e, as the company rides tailwinds from early-stage growth in the overall cloud industry. Google Cloud is currently the 3rd largest cloud provider in terms of market share (IaaS, PaaS, Cyber Security), growing as fast as Microsoft’s Azure, and faster than industry leader Amazon Web Services. We expect Google Cloud to maintain this position moving forward given the company’s continued CAPEX spend to boost its cloud infrastructure and its aggressive go-to-market strategy.

We Initiate coverage with an ACCUMULATE rating and a target price of US$3380.00 based on DCF valuation, with a WACC of 6.9% and terminal growth of 4%.


GOOGL posted US$182bn in revenue for FY20 – growing 13% YoY, with 92.5% of its total revenue coming from its Google Services segment, 7.2% from its Cloud segment, and the remaining 0.3% from Other Bets (Figure 5). In terms of revenue breakdown by geography, 47% of revenue comes from the US, 30% from EMEA, 18% from APAC, and 5% from other regions (Figure 9). Gross Profit for FY20 was US$98bn, with gross margins of 53.6%. PATMI was US$40bn, with net margins of 22.1%.


Google Services: This segment can be divided into two portions, Advertising (87%), and Other Services (13%). As the name suggests, revenue derived from all forms of advertising fall into the first portion, and revenue from in-app purchases, hardware sales, and subscription fees fall into Other Services. Advertising brought in US$147bn in revenue for FY20, with Other Services recording US$22bn in revenue. Advertising can be further broken down into three main components: Google Search, YouTube Ads, and Google Network Members’ Properties.


Google Search is the segment’s main revenue driver, with revenue of US$104bn in FY20 (62% of services revenue, and 57% of total revenue), and includes advertising revenue generated on Google search properties, as well as revenue from other products like Gmail, Maps, and Google Play (Figure 10).


YouTube brought in US$20bn of revenue in FY20, and mainly consists of ad revenue generated on YouTube properties. It has been the fastest growing vertical within Google Services for the last 3 years, with revenue increasing at a 3-year CAGR of 34% (Figure 11), compared to overall segment growth of 17%. The platform has seen an increase in adoption rate, both from content creators, as well as users, with more than 2 million content creators, an estimated 2

billion monthly users, and over a billion hours of video watched daily. This strong growth in adoption has been a result of GOOGL’s increasing efforts to commercialise YouTube through digital ad placements, which are placed on every video content on the platform. These ad placements incentivize content creators – who get paid with each additional ad-click on their videos, to generate more content, which in turn attracts more users onto the platform. We expect YouTube revenue to continue its high growth rate, supported by strength in user reach and advertising effectiveness.


Google Network Members’ Properties recorded revenues of US$23bn for FY20, and they are mainly derived from revenue generated from Google Ad Manager, AdSense, AdMob. The products in this component are generally geared towards helping publishers create, manage, and track their direct ad response campaigns.


Revenue from the entire Google Services segment was US$168bn for FY20, increasing 11% YoY, driven mainly by retail advertisers as global spending continues to increase.


Google Cloud: This segment includes Google’s infrastructure and data analytics platforms, as well as other enterprise solutions, and are split into two main properties: Google Cloud Platform (GCP), and Google Workspace – formerly known as G Suite. Google Cloud recorded revenue of US$13bn in FY20, and is currently the fastest growing segment in the company, with a YoY growth rate of 46%. The company focuses on building products in the IaaS, PaaS, and Cyber Security space.

Other Bets: This segment contributes the smallest portion to total revenue, at only US$0.7bn in FY20. Revenue in this segment is primarily derived through licensing and R&D services.


Growth Trajectory: We see strong growth potential in a couple of segments and verticals. In terms of digital advertising, we expect YouTube Ads to continue being the fastest growing vertical in the Google Services segment, with revenues projected to grow 82% and hit US$36bn by the end of FY22e. This comes as we see continued adoption of smartphones and streaming services acting as tailwinds for increasing spend in video advertising moving forward.


In terms of cloud opportunities, we continue to see Google Cloud as an undervalued opportunity for GOOGL moving forward. Google Cloud has firmly positioned itself in 3rd place  in the global cloud market, and is growing as fast, or faster than its main competitors Microsoft Azure and Amazon Web Services (figure 12). Google Cloud has also been the company’s fastest growing segment for the last 3 years, growing at a 3-yr CAGR of 48%. We expect this to continue moving forward, as the company rides tailwinds from the overall cloud industry which is still in its early stage of growth.


Revenue Growth: We expect total revenue growth for FY21e to hit US$253bn, which would represent a 39% YoY growth. In terms of revenue growth by segment, we forecast Google Services to increase 38% YoY (US$233bn), Google Cloud to jump 46% YoY (US$19bn), and Other Bets to rise 17% (US$0.8bn).


Other Income: GOOGL recorded other income of almost US$7bn for FY20, increasing 27% YoY, representing almost 4% of total revenue. This was mainly due to net interest income of US$1.7bn, and a US$5.6bn net gain on equity securities.


The “Rule of 40” was first introduced as a benchmark to measure the balance between growth and profitability of SaaS companies, taking into account both revenue growth, as well as profitability (Revenue Growth + EBITDA Margins), with the addition of both metrics needing to exceed the 40% threshold. We have modified this slightly by averaging revenue growth over a 3-year period compared to just a single period growth rate. Adding together GOOGL’s 3-year average revenue growth of 18.1% and its EBITDA margin of 30.1%, the total of 48.2% is > than our required threshold of 40% (Figure 8).


The cost of sales grew 18% in FY20 to US$85bn, largely due to an increase in content acquisition for YouTube, as well as increasing Traffic Acquisition Costs paid to distribution partners. Operating expenses include research and development (15% of revenue), sales and marketing (10%), and general and administrative (6%). Total Operating Expense as a percentage of revenue has been reducing over the last 4 years, from 35% in FY16 to 31% in FY20, and we expect this trend to continue as the company grows its high operating leverage businesses.

CAPEX for FY20 was US$23.3bn (12% of revenue), a slight decrease from US$23.5 in the previous year. We expect CAPEX to increase moving forward, in line with GOOGL’s guidance about bolstering its IT infrastructure to better support its services (Figure 13).


GOOGL has seen a steady decline in gross margins over the last few years, decreasing from 61% in FY16 to 54% in FY20. This was largely due to the company’s aggressive investments in expanding its Cloud business as they play catch-up with cloud leaders Amazon and Microsoft. However, we do see GOOGL’s gross margins reversing this trend moving forward, as its Cloud business turns the corner on profitability.

Net margins in FY20 were 21%, remaining relatively flat over the last few years. We expect net margins to jump significantly in FY21e to about 29%, based on increases in efficiency and scalability of its high operating leverage businesses (Figure 14).


Assets: Cash and cash equivalents increased by about US$8bn YoY in FY20, largely due to significant increases in cash flow from operations, partially offset by an increase in purchases of non-marketable securities. Marketable securities increased US$9bn, led by a combination of increasing net purchases, and increases in unrealized gains on securities held. Plant, property and equipment for FY20 was US$85bn, an increase of US$9bn from the previous year, largely due to continued CAPEX spending on IT infrastructure and facilities. The company’s current ratio for FY20 was 3.1.

Liabilities: Current liabilities for FY20  were  US$57bn, almost US$12bn more than FY19. This increase was mainly due to  a rise in accruals. Non-current liabilities saw a jump of US$11bn in FY20, largely due to a US$10bn issuance of fixed-rate senior unsecured notes. GOOGL’s debt-to-equity ratio remains low at only 0.06.


Free Cash Flow (FCF) in FY20 was US$43bn, a 38% increase from FY19. We expect FCF to continue growing well due to an exponential increase in cash from operations.


GOOGL has evolved over time from a company that provides answers to peoples’ questions, into one that now helps resolve these questions. GOOGL’s revenue is driven by 2 main segments categorized under Google Services, and Google Cloud. It’s 3rd segment, Other Bets, include projects with a long term view in mind.


Within the Google Services segment, the products on offer cover almost the entire internet, ranging from services that provide answers to people who seek them -- Search,  and navigation services – Maps, to on-demand entertainment – YouTube. The strength of this segment is a combination of a heavily diversified products portfolio, and its scalability and reach. Most of the revenue generated from Google Services falls into advertising revenue, which the company generates from selling ad-placements, as well as targeted ad campaigns to advertisers. The segment generated US$55bn in operating income for FY20, an 11% YoY increase.


GOOGL’s other main segment, Google Cloud, has become the company’s fastest growing segment in recent times, growing at a 3-year CAGR of 48%, with revenue from this segment as a  percentage of total revenue almost doubling from 3.7% in FY17, to 7.2% in FY20. Products within this segment are geared towards enterprise solutions, with a focus on IaaS, PaaS, and Cyber Security. The two main components are  GCP and Google Workspace – formerly known as G Suite, focusing on producing collaborative tools that leverage Artificial Intelligence and Machine Learning technologies to improve business efficiency. Revenue for this segment is primarily generated through subscription fees received for the use of its services.

When it comes to data privacy, GOOGL has also taken several initiatives in an effort to  support its users, while preserving strength in its core businesses. The company has promised to remove 3rd party cookies on Chrome by late FY23e, while also refusing to implement alternative tracking methods. We believe GOOGL also has the capacity to collect sufficient first-party data through its multiple touch points to maintain effective advertising campaigns, which should position them well in an environment with stricter data privacy standards.


Due to the plethora of products covering multiple industries, GOOGL faces competition from other search engines, social media companies, video service providers, cloud providers, tech hardware manufacturers,  and a host of competitors in smaller verticals. However, GOOGL is still the industry leader in its two main segments: Digital Advertising, and Cloud Services. It also holds a significant market share for many of its products.


Google Search. Search is by far the most dominant general online search engine, with over 92% market share globally, and 87% domestically in the US. It has high barriers to entry due to the high fixed costs of servers associated with crawling and indexing the entire internet. It is also the default search provider on 87% of desktop computers.


Android. Android is the most dominant mobile operating system in the world, running on roughly 75% of the world’s mobile devices. Even though GOOGL does not monetize Android, it does require mobile phone manufacturers seeking to use Android as an operating system to sign licensing agreements that dictate how certain GOOGL apps have to be pre-installed, and placed in prominent spaces on these devices, extending the visibility of such products from desktop to mobile. In addition, Android provides GOOGL with real-time market data on its users and developers which GOOGL can monetize through its advertising business.


Play Store. Play Store is the primary app store on all Android devices, essentially serving as a sentinel for software distribution on mobile devices. It generates revenue by charging developers commissions of up to 30% on application downloads, as well as in-app purchases.

Chrome. Chrome is the default web browser for all things GOOGL, and has become a global leader in web browsers since its inception in 2008. It is estimated to have about 66% of overall web browser usage globally, partly because it is the default web browser on all Android devices. It also has strong network effects which act as its moat, where web developers are attracted to Chrome because of its large user base, and users are attracted to the browser because of its usability and compatability in running an array of webpages. While GOOGL does not monetize Chrome, the product acts as a gateway for users to other GOOGL products such as Google Search and Google Workspace.


Maps. It is estimated that GOOGL dominates the digital maps market with over 80% market share split between Google Maps and Waze – which it acquired in 2013. It is likely to maintain this dominance moving forward due to the high barriers to entry – high fixed costs for mapping data. GOOGL is in the early stages of monetizing its digital maps products, by selling map advertising to businesses aiming to maximize foot traffic.


YouTube. YouTube is GOOGL’s fastest growing product, and revolves primarily around video entertainment. With more than 2 million content creators, an estimated 2 billion monthly users, and over a billion hours of video watched daily, YouTube is the 2nd most used social media platform globally. Revenue is mainly generated through sales of digital advertising placements to marketers, although it recently introduced a premium subscription service that allows users ad-free videos and music, as well as other premium features. The increasing preference and consumer adoption of short-form and on-demand video services should support growth for this product moving forward.

GOOGL has been riding the tailwinds in the digital advertising industry, and we expect this trend to continue moving forward, based on changing consumer behaviour and increased digitalization globally. Worldwide digital advertising spend is expected to continue increasing over the next 4 years at a 11% CAGR (Figure 15), which we believe GOOGL is well positioned to capture as the industry leader. It’s main competitors in this space are Facebook, Twitter, Snapchat, and Amazon.


For Cloud, GOOGL has been outpacing its competitors in terms of growth, with a 3-year CAGR of 48%. Within the IaaS and PaaS sectors, GOOGL is currently in 3rd place with a 7% market share, behind Microsoft’s Azure and Amazon’s AWS, and we expect them to solidify this position with its increasing CAPEX spending on cloud infrastructure. With the overall cloud industry expected to see a 21% CAGR over the next 3 years (Figure 16), we believe there is ample room and tailwinds from the industry to support an expansion of GOOGL’s services and market share in the industry. Competitors in this segment include Amazon, Microsoft and Alibaba.



  1. Ongoing antitrust lawsuits. GOOGL has continuously been involved in antitrust lawsuits over the last few years, both from regulators in the US, as well as abroad. Most of these lawsuits have resulted in fines without significant impact on operations, although there have been suggestions that tougher consequences – breaking up the company, should be imposed. As long as the outcomes of the lawsuits remain solely as fines, we view these risks as relatively benign.


  1. Potential for stricter data privacy regulations. We see a continued focus by regulators in attempting to impose stricter data privacy regulations, and we think that it is only a matter of time before such regulations are passed. These regulations could provide a significant headwind for companies that rely heavily on data to drive their business, which GOOGL does. The company has been attempting to mitigate these risks by tightening its internal policies on data collection to stay ahead of potential future regulations.


We initiate coverage on Alphabet Inc. with an ACCUMULATE rating and a price target of US$3380.00. Our valuation is based on DCF, using a 6.9% WACC and 4.0% terminal growth rate.



Get access to all the latest market news, reports, technical analysis
by signing up for a free account today!