Photo by Pawel Czerwinski on Unsplash

Alphabet (GOOGL), formerly called Google, maintains the largest online index of websites accessible through automated search technology, notes Joseph Bonner.

The company generates revenue through online advertising, cloud services, and hardware. Google is now an operating segment of Alphabet.

While the company expected revenue headwinds in 3Q22 from a variety of factors, the pullback in advertising spending first noticed in 2Q appears to have deepened in 3Q. In addition, the depth and duration of this weakness are unclear. But whatever happens to the advertising market as a whole, we expect Alphabet to remain a dominant player.

We see Alphabet as one of the industry’s leaders, along with Meta Platforms (META), Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT). These companies have come to dominate new developments in mobile, public cloud, and big data analytics, as well as emerging areas such as artificial intelligence, virtual/augmented reality, and even quantum computing.

While Alphabet has been criticized as a Johnny-one-note for its dependence on digital advertising, the powerful ramp-up in digital advertising as economies have reopened, combined with Google’s dominant position, has certainly been a financial plus.

Search advertising, whether on Google sites or through its third-party Google Network (on desktop or mobile), remains the crucial revenue driver, even as other businesses, like YouTube, Google Play, and Google Cloud (the so-called “second wave”) have ramped up to multi-billion dollar businesses in their own right.

Alphabet is beset by antitrust investigations and lawsuits both in the U.S. and internationally.The company faces headline risks over these lawsuits, and investor uncertainty over regulatory outcomes may create an overhang for GOOGL shares. Of course, the company also faces possible sanctions if the outcomes are unfavorable.

That said, the shares appear attractively valued given the company’s rapidly expanding businesses. Our financial strength rating on Alphabet is High, our highest rating. The company’s credit ratings are in the high A’s, high-quality investment grade, with stable outlooks.

Alphabet’s trailing EV/EBITDA multiple of 12.2 is below the peer median of 14.6. The forward EV/EBITDA multiple of 9.3 is 27% below the peer average, compared to an average discount of 16% over the past two years. We are maintaining our "buy" rating on GOOGL to a target price of $150.

Joseph Bonner is an analyst with Argus Research, a leading independent Wall Street research firm.

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