In its Q3 2024 earnings report, Alphabet showcased the impact of its substantial AI investments, which are driving impressive returns, particularly in cloud computing and its core search business. The company's approach—leveraging AI across its product suite while maintaining cost control—has fostered both revenue growth and margin expansion. Following the earnings release, Alphabet shares have risen by 5.8% to $181.22 in pre-market trading.
Q3 2024 Results vs Estimates
Start investing today or test a free demo
Open real account TRY DEMO Download mobile app Download mobile app- Revenue: $88.27 billion (+15% YoY) vs estimate $86.45 billion
- Google advertising revenue: $65.85 billion vs estimate $65.5 billion
- Google Search & Other Revenue: $49.39 billion vs estimate $49.08 billion
- EPS: $2.12 vs estimate $1.84
- Operating income: $28.52 billion vs estimate $26.67 billion
- Operating margin: 32% vs estimate 31.4%
- Capital expenditure: $13.06 billion vs estimate $12.88 billion
Overview of Q3 Performance
Alphabet's third quarter results showcased strong performance across all major segments. The company's core advertising business demonstrated resilience with 12% growth in Search revenue, while YouTube maintained robust growth despite competitive pressures. The standout performer was Google Cloud, which saw revenue surge 35% year-over-year while dramatically improving profitability, achieving a 17.1% operating margin.
The integration of AI capabilities across Google's product suite has begun showing tangible benefits. AI-powered features in Search have led to increased user engagement and query volume, while maintaining cost efficiency through a 90% reduction in processing costs over 18 months. The company's AI Overview feature has now reached over 1 billion monthly users across more than 100 countries.
Cloud Services Evolution
Google Cloud has emerged as a strong competitor in the cloud market, with AI capabilities driving deeper product adoption and larger deal sizes. The segment's impressive 35% growth rate and significant margin improvement demonstrate successful execution of the company's enterprise strategy. Customer adoption of AI solutions has been particularly strong, with Gemini API calls growing 14x over six months.
Search and Advertising Momentum
The core Search business has successfully integrated AI features while maintaining profitability. Circle to Search is now available on over 150 million Android devices, with one-third of users engaging weekly. Lens has achieved 20 billion monthly visual searches, with 25% showing commercial intent, creating new opportunities for advertising revenue.
YouTube Performance
YouTube has successfully navigated the competitive landscape of short-form video, with 70 billion Shorts watched daily and 70% of channels now uploading Shorts content. The platform's combined advertising and subscription revenue has exceeded $50 billion annually for the first time, marking a significant milestone in its evolution.
AI Integration and Innovation
Alphabet continues to invest heavily in AI infrastructure while improving efficiency. The company has achieved significant cost reductions in AI query processing while expanding capabilities, with over 25% of new code now generated by AI. These improvements position the company well for future AI-driven growth across its product portfolio. The cloud segment's strong growth trajectory and improving margins suggest continued momentum in enterprise adoption. Google's AI capabilities and infrastructure investments provide competitive advantages in capturing growing enterprise cloud spending, particularly in AI workloads. Despite concerns about competition, Google's advertising business continues to show resilience. The integration of AI in advertising products and the expansion of visual search capabilities create new opportunities for revenue growth, particularly in commercial searches.
Regulatory Environment
Alphabet faces ongoing regulatory scrutiny, including antitrust investigations in the US and EU. While these present long-term risks, the company's strong execution and diverse revenue streams provide some mitigation against regulatory impacts.
Capital Expenditure Strategy
In Q3 2024, Alphabet invested $13 billion in capital expenditure, with the majority directed toward technical infrastructure. The investment strategy shows a clear prioritization of AI and cloud capabilities, with spending divided into two main categories:
- Technical Infrastructure (Primary Focus):
- 60% allocated to servers (TPUs and GPUs)
- 40% directed to data centers and networking equipment
Looking toward Q4 2024, management expects to maintain capital expenditure at approximately the same level as Q3, around $13 billion. This consistent investment level demonstrates the company's commitment to building out its AI and cloud infrastructure.
2025 Investment Outlook
For 2025, management has indicated an increase in capital expenditure, though not at the same dramatic pace seen between 2023 and 2024 (which saw approximately a 55% increase). To put this in context, 2024 capex is expected to reach $50-52 billion, while current consensus estimates for 2025 project around $54 billion. However, management commentary suggests the actual increase could be more substantial, potentially in the range of $8-10 billion above 2024 levels.
The investment strategy reflects several key priorities:
- AI Infrastructure Expansion: Continued investment in both TPUs and GPUs to support growing AI workloads across products
- Data Center Growth: Strategic expansion of data center footprint to support cloud services and AI computing demands
- Network Infrastructure: Enhanced networking capabilities to support real-time AI services and cloud operations
Valuation
We based our projections on historical averages, adjusting upwards for anticipated AI-driven growth. This results in an 18% revenue growth and a 33% operating margin across the 5-year forecast. Considering the substantial influence of terminal value in DCF analysis, especially for shorter forecast periods, we’ve applied a conservative 5.5% revenue growth and a reduced 9.3% terminal WACC (down from the 10.3% used in forecast years) to capture AI-driven impact. This reflects an optimistic growth outlook, with high forecasted CapEx to represent the company's investments in AI development.
Under these assumptions, our model suggests an intrinsic value of $216.11 per share, indicating a 27.36% upside relative to the current market price. It’s important to note the high sensitivity of DCF-derived intrinsic values to input assumptions. Below, two sensitivity matrices illustrate different Operating Margin and Revenue Growth scenarios, as well as Terminal WACC and Terminal Revenue Growth variations.
Source: Bloomberg Finance LP, XTB Research
Source: Bloomberg Finance LP, XTB Research
To analyze Alphabet's positioning against its peers, we created three distinct peer groups with 4–5 companies each. These groups are based on revenue segments, highlighting advertising, cloud, and AI. Given that almost 80% of Alphabet's revenue is derived from advertising, this segment will heavily influence peer comparisons. Cloud services and AI form the other groups, with AI expected to play an increasingly significant role in Alphabet’s future earnings, prompting us to overweight its importance in later analyses.
Source: Bloomberg Finance LP, XTB Research
Advertising, as the core revenue source, is assigned a 50% weight in our peer valuation. We identified Meta, Snap, Reddit, and Netflix as relevant advertising peers. Across various valuation metrics, Alphabet remains below the mean, median, and cap-weighted averages of these peers. When factoring in three specific valuations the analysis indicates Alphabet may still present upside potential relative to its peers.
Source: Bloomberg Finance LP, XTB Research
AI is poised to significantly impact Alphabet's future earnings, so we've assigned it a 30% weighting due to its potential to drive further business model evolution. We identified five peers for the AI segment: NVIDIA, Amazon, Palantir, Microsoft, and IBM. In comparison, Alphabet trades below the mean, median, and cap-weighted multiples of these peers. Our analysis, incorporating various valuation models, suggests Alphabet may still offer upside potential.
Source: Bloomberg Finance LP, XTB Research
Cloud services represent another important revenue stream for Alphabet, with a 20% assigned weight. Here, peers include Amazon, Meta, Microsoft, and IBM. Once again, Alphabet's valuations are below average across key metrics, indicating additional potential for growth in comparison to its peers, based on our comparative valuation models.
Source: Bloomberg Finance LP, XTB Research
With our weighted valuation approach—50% for ads, 30% for AI, and 20% for cloud—we've found that Alphabet remains below the average across key metrics relative to its peer groups. This suggests Alphabet may have room for additional growth based on our final comparative valuation analysis.
Source: Bloomberg Finance LP, XTB Research
Recommendations: Alphabet has 70 recommendations, with 58 "buy" and highest price of $241.58, 12 “hold” with lowest price of $170. The 12-month average stock price forecast is $202.85, implying a 19.5% upside potential from the current price.
Technical analysis:
Alphabet's stock is trading above the 50- and 200-day SMAs, recently closing above the 100-day SMA. The initial resistance is at the 61.8% Fibonacci retracement, which has shown limited reaction previously. For bears, retesting all three moving averages is key, with the 200-day SMA at $161.41 being pivotal. A breakdown could open a test of the 23.6% Fibonacci level. The RSI displays bullish divergence and is nearing the oversold level for the first time in three months. Additionally, a recent MACD buy signal and expanding 50-day SMA above the 200-day SMA hint at a return of bullish sentiment.
Source: xStation
