While the name Alphabet (GOOGL) might not ring many bells among non-investors, its largest subsidiary, Google, is certainly a household name. Alphabet is a parent company to Google and was created in 2015 in a move designed to better reflect the company’s modus operandi.
Alphabet Inc. consists not only of the world’s most notable search engine but also of several other research & development companies and technology businesses. This re-branding has helped to make Google more transparent and more accountable, and as it’s name “alpha bet” connotes, the firm aims to attract investors with market beating returns.
Alphabet, and Google in particular, are names synonymous with global dominance in technology, but how does that translate to GOOGL stock price?
What is Alphabet’s valuation, and what are the factors that play a part in determining this valuation? Here, we examine the company’s business model, growth drivers, revenue and earnings growth, biggest competitors, margins, international growth, and discounted cash flow forecast. This thorough examination will provide a comprehensive valuation of Alphabet.
Alphabet Valuation: What Is Google Worth?
Technically speaking, valuation is the process of analyzing the current or future worth of a company. In truth, there are several ways to do this.
For instance, market capitalization involves multiplying the company’s share price by its total number of shares outstanding.
The times revenue method multiplies the company’s revenue earned during a set period of time by a number determined by industrial and economic factors.
And a popular approach employed by most investment firms is the Discounted Cash Flow (DCF) method, which will be touched on later in this piece.
Market Cap and Enterprise Value
Regardless of the specific type of valuation, there are an array of figures that always play a part. Let’s look over Alphabet’s — starting with market cap.
Currently, Alphabet’s market cap sits close to $2 trillion. This is more than double what it was at the lows of March 2020.
The company’s enterprise value, which takes the company’s debt into consideration, is not far off: it currently resides at $1.82 billion, more than double the year prior’s number of $889.66 billion.
Trailing and Forward P/Es and PEG Ratio
Beyond market cap and enterprise value, there’s Alphabet’s trailing and forward P/Es. (Trailing uses the company’s earnings per share from the last 12 months, while forward uses the company’s forecasted earnings per share over the next 12 months.)
Trailing is $28.12, while forward is $26.88. These numbers factor directly into Alphabet’s PEG Ratio, which is the P/E ratio divided by the growth rate of its earnings.
Alphabet’s has shrunk by nearly half since this time last year, which sounds bad, but is actually great news: by falling from 1.68 to 0.88, Alphabet stock has entered undervalued territory.
Price/Sales and Price/Book Ratios
Price/sales and price/book are two common ways to examine a company’s valuation.
Price/sales compares a company’s price per share to its revenues, and Alphabet’s is 8.30 — a notable increase since Q3 2020’s 6.14.
Traditionally, the lower the price/sales ratio the better, though the pace of growth plays a large part in what is “good” and what is “bad”.
The Alphabet P/S ratio is down since Q2 of 2021, when it sat at 8.72, but it’s still far off from what it was just a year ago.
The company’s price/book has an even more drastic increase since Q3 2020: It has risen from 4.80 to 7.92. Like price/sales, lower is usually better for value investors — yet the Alphabet P/B has been on the rise.
Enterprise Value/Revenue and Enterprise Value/EBITDA
Last, but certainly not least, is Alphabet’s enterprise value/revenue and enterprise value/EBITDA. These valuation measures compare the company’s enterprise value to its revenue and its earnings before interest, taxes, depreciation, and amortization.
As with several other valuation measures, the lower the better for these numbers. Alphabet’s enterprise value/revenue is currently 7.61, which is significantly lower than Q3 2020’s figure or 19.27.
The story is similar for Alphabet’s enterprise value/EBITDA, which has fallen from 52.69 in Q3 of 2020 to 18.56 today.
Alphabet Business Model
With these valuation figures in mind, it’s worth taking a look at Alphabet’s business model to see how the company actually makes money. A business model is, of course, the core profit-making plan. Business models define the products and services a company will sell, outlines its target market, and details any expected costs. Alphabet’s business model is pretty uncomplicated, but nonetheless fascinating.
The company provides a whole slew of Internet-related software, services, and solutions, including — most famously — the search engine Google. Beyond this, though, Alphabet also offers cloud services, a streaming service, operating systems and applications for mobile devices, and is constantly working on all sorts of other groundbreaking and innovative technology.
Through all this, Alphabet uses its line of products, services, and platforms to bring in a massive amount of advertising revenue. However, unlike when Google stood alone, Alphabet has been working hard to diversify its revenue sources.
While advertising still plays a major role, it’s not the only thing the company has going for it. In recent years, cloud services, licensing, and various other Alphabet sites beyond Google Search have begun to pull its own weight much more than in the past.
These alternate revenue sources — many of which fall under the umbrella of Other Bets — go beyond simply collecting advertising money to bring in money from the sale of services, the cost of licensing, and the profits earned through research and development.
Alphabet Growth Drivers
Gaining a better understanding of what drives Alphabet’s growth will help shine a light on the company’s business model and the course of the company’s valuation in future quarters. As it turns out, there’s a wide range of growth drivers for Alphabet.
From the company’s search engine capabilities to its cloud computing services to its innovative research & development work, Alphabet’s growth drivers are some of the most diverse in the technology industry.
The following are a handful of examples of the great multitude of Alphabet growth drivers currently working in the company’s favor now and into the future.
Google Search
Above all else, the biggest growth driver for Alphabet is Google Search — and it’s not even a close call.
From from paid ad clicks to traffic acquisition costs, Google Search alone generated over $104 billion in revenue in 2020.
For reference, that’s a whopping 71% of Google’s ad revenue for the year and a massive 57% of Alphabet’s total revenue for 2020. That’s no easy feat. There’s no doubt Google Search is what drives Alphabet’s growth more than anything else.
YouTube Streaming
While anything is going to pale in comparison to Google Search revenue, YouTube streaming and its premium entertainment offerings is undoubtedly one of the most noteworthy growth drivers for Alphabet.
YouTube ad clicks and the money brought in from the site’s streaming subscription service and video on demand offerings totaled nearly $20 billion in 2020 alone — a number not to be dismissed despite falling short of Google Search’s numbers.
Google Cloud
Like YouTube, Alphabet owes a not insignificant portion of its annual revenue to Google’s cloud computing and storage services.
Several big names have trusted its data storage and IT systems to Alphabet’s cloud services, including the Mayo Clinic, Macy’s, and Deutsche Boerse Group, and it’s only fair to assume that even bigger, even more profitable names will make the switch in the future.
Cloud brought in $13 billion for Alphabet in fiscal year 2020, and there’s great confidence in the fact that this number will only continue to grow in the years to come.
X Development
Formerly known as Google X, X Development is Alphabet’s research and development branch.
While primarily known for working on Google’s own self-driving vehicle, X Development is also home to many other semi-secret projects that fall under the umbrella of what’s known as speculative design.
The ultimate goal is to find innovative solutions to complex problems. While much of what X Development does on a daily basis remains somewhat unknown, many of its graduated projects — such as Waymo, which will be discussed in a moment — show that the research & development team is more than capable of creating the kind of technology that helps Alphabet grow as a company.
Artificial Intelligence and Quantum Computing
In a field adjacent to the work being done at X Development, Alphabet also has a lot riding on the company’s artificial intelligence and quantum computing branches.
AI has the power to improve every single aspect of Alphabet’s business model, from search to streaming to cloud computing and everything in between. The same goes for the work being done on quantum computing over at Alphabet.
These two aspects are key to the company’s growth going forward, and the success of Alphabet’s artificial intelligence and quantum computing will determine just how great that growth will be.
Waymo
More than Apple, Microsoft, and Amazon, Alphabet’s Waymo has managed to become the self-driving vehicle industry standard in recent years — and, in truth, it’s really not even close.
Thanks to the reliability of the company’s pre-existing AI and machine learning technology, Waymo quickly and easily became the planet’s one and only operational self-driving ride-hailing service.
If Alphabet’s work with Waymo has already seen this much success in the less than five years since making its debut, imagine just how much growth Waymo will drive in the years to come.
Alphabet Revenue Growth
With the release of the company’s latest quarterly earnings, Alphabet managed to successfully exceed many of the predictions Wall Street analysts had made for the company prior to the earnings call. Where analysts predicted $63 billion for Q3 2021, Alphabet ended up reporting over $65 billion.
Much of this revenue is thanks to the company’s advertising revenue, which increased 43% to $53.13 billion — a significant jump from Q3 2020’s $37.1 billion in quarterly advertising revenue. Alphabet’s cloud services also saw a big increase, rising 45% to $4.99 billion for the third quarter of 2021.
Strangely enough, though the company exceeded these revenue expectations on the whole, Alphabet revenue actually fell short in some areas of its business model: YouTube ad revenue came in at $7.2 billion instead of the $7.4 billion analysts predicted, and Google Cloud revenue reported $4.99 billion instead of the anticipated $5.07 billion expected.
In Alphabet’s defense, the former’s disappointment was blamed on Apple’s recent privacy changes — Facebook and Snap also expressed similar sentiments. Not to mention, despite falling short of estimates, YouTube’s ad revenue still rose significantly over the streamer’s Q3 2020’s quarterly ad revenue of $5.04 billion.
Last year, Alphabet brought in over $182 billion in revenue. Looking at how well the company has been doing this year, it will not be surprising to see Alphabet exceed’s last year’s numbers at the close of the fourth quarter of 2021. $182 billion is a gargantuan amount of money, and Alphabet’s revenue growth looks all the more impressive when comparing it to years past.
Jump back just five years to 2015, and Google was reporting just under $75 billion in revenue for the year. Go back five years further to 2010, and annual revenue was $29 billion. Five years earlier than that, just $6 billion.
Growing annual revenue by over $175 billion in 15 years is a truly unbelievable feat. Just imagine Alphabet’s revenue growth 15 years from today.
Alphabet Earnings Growth
Revenue is one thing, but earnings are something else altogether — after all, to truly assess a company’s value, it’s important to look at the net income as well as the gross income.
That’s what earnings are — the net income, or earnings, calculates a company’s total revenue minus the cost of goods sold, the general cost of administrative expenses, the cost of operating expenses, the cost of depreciation, the cost of interest, the cost of taxes, and whatever other expenses that take away from the company’s bottom line. This is just as true of Alphabet, who certainly has impressive revenue growth but also merits an assessment of earnings growth, as well.
While Alphabet brought in over $182 billion in revenue for the year last year, the company’s earnings were $40.2 billion.
These earnings factor into the earnings per share, or EPS, which is a calculation of the net profit divided by the number of common shares a company has outstanding. For FY 2020, Alphabet’s annual EPS was $58.61 – an astonishing figure given that when it first came public Google share price traded at around $80 per share at one time. In short, the current earnings per share rival the entire market cap of Google a few decades ago.
Applying this earnings-versus-revenue comparison to previous years, you can see that Google’s 2015 earnings were $15.8 billion compared to $75 billion in revenue, with an annual EPS of $22.84. 2010’s earnings were $8.5 billion compared to $29 billion in revenue with an EPS of $13.16. 2005 saw the company bringing in $1.4 billion compared to $6 billion in revenue and an EPS of $2.51.
This discrepancy is fascinating to observe, and while the difference is never enough to put Alphabet in the red after accounting for expenses and costs, it’s still enough to bring those annual numbers down by quite a bit.
Alphabet Competitors
Another key aspect of valuing a company is the threat posed by its closest competitors. In Alphabet’s case, these competitors are some of the other biggest titans in the big tech industry. Namely, Baidu, Microsoft, and Apple.
It’s essential to consider these competitors and evaluate each’s potential to outperform Alphabet. But how serious are these threats to Alphabet, especially considering the sheer size and power of the company and its dominance over all other search engines by a tremendous margin?
While there are countless competitors that could be considered here, especially considering Alphabet’s extreme diversification across the search, entertainment, AI, and tech industries, Baidu, Microsoft, and Apple are the only ones worth talking about because they are the only companies with a comparable size to Alphabet’s.
Underdogs like Duckduckgo are worth analyzing, but when you’re dealing with a company as impossibly big as Alphabet, the odds of an underdog coming along and besting them is slim to none. With this in mind, let’s take a look at the threats Baidu, Microsoft, and Apple pose to Alphabet’s valuation at large.
Baidu
Baidu, Inc. (BIDU) is a multinational technology company based in China and specializing in Internet products and services as well as the field of artificial intelligence.
Colloquially speaking, Baidu is typically referred to as the Google of China — it’s the country’s largest search engine, for starters, but beyond this, it also owns and operates an enormous web of cloud and streaming offerings.
Not to mention, Baidu stock saw a major leap at the start of this year, rising from under $90 in March of 2020 to over $330 in February of 2021. (Of course, it has fallen back down to under $160 in the months since, but the point is that Baidu has the potential to rally again.)
Still, the point remains: Baidu has a sizeable hold on the search engine industry and has also made significant strides with its AI technology as well as its driverless and electric vehicle. It might not be as substantial as Alphabet, but Baidu dominates its own region, China.
Microsoft
Next to Alphabet’s Google, the next-biggest search engine is Microsoft’s Bing.
This isn’t the only thing that makes Microsoft (MSFT) a top Alphabet competitor, though: Microsoft is also well-versed in the world of big tech, constantly creating new software and cloud computing technology, working hard to innovate AI, and even investing in the research and development of a self-driving vehicle.
Perhaps most surprisingly, while Microsoft is considered by many to be second to Alphabet, especially when comparing Google to Bing or Gmail to Outlook, the truth is that Microsoft’s 2020 earnings actually exceeded Alphabet’s: $44.28 billion compared to Alphabet’s $40.27 billion.
Alphabet might have had the greater revenue — $182 billion for the year compared to Microsoft’s $143 billion — but Microsoft actually ended up coming home with more of what counts – earnings – than Alphabet last year.
Without question, Microsoft is the biggest threat Alphabet faces — not only does the company have the software and the technology to compete on Alphabet’s same level, it also has the profits to match.
Apple
While Apple (AAPL) might not be exactly the same as Alphabet, with the former lacking the kind of search engine or software innovations as the latter, the two tech giants are still competitors for a whole plethora of reasons.
For starters, there is the rivalry between Alphabet’s Android operating system and Apple’s iOS — while Alphabet has the greatest market share on mobile device operating systems, Apple’s is undoubtedly the company’s greatest competitor in this field. Apple is the revenue market share leader while Alphabet is the volume market share leader.
Soon these two behemoths may go toe to toe in the world of driverless cars too, if the speculation is to be believed.
Famously, Google has failed to live up to the hardware standards of Apple with initiatives like Glass failing while Apple continues to go from strength to strength, only rivaled by Samsung when it comes to device popularity.
Facebook/Meta
Of these top four Alphabet competitors, Meta (FB) might seem like the least similar of the bunch. In reality, though, Alphabet and Facebook share one thing in common, and that’s the digital advertising industry.
The two companies are neck-and-neck when it comes to ad revenue, and both have seen price per share increase rapidly over the last three years especially.
In other words, both Alphabet and Facebook are experiencing solid, dependable growth and continue to see much of its annual revenue come from advertising — thus making them quite similar in this regard.
Beyond this, Meta, Facebook’s parent company, is just as invested in researching and developing innovative software and tech as Alphabet. These two companies are more than just places where digital marketing and advertising happens — both are making significant strides with artificial intelligence, as well.
Alphabet Margins
One of the most essential metrics in a company’s valuation is profit margin. By dividing the operating income by the net sales, you can get a better idea of just how much a company actually makes for every dollar earned after production costs are paid but before taxes and interest are paid.
At the close of the third quarter of 2021, Alphabet’s net profit margin for the quarter was 29.52%. This percentage represents the steady and ever-increasing percent profit margin that Alphabet has been reporting every quarter since Q2 of 2020, which was 18.99%.
It’s important to note that Alphabet’s net profit margin for Q3 2021 was a return to form of sorts. The company’s net profit margins have been all over the place for the past decade or so, rising and falling with each new quarter until Q2 2020, where margins began a confident upward stride.
The last time Alphabet saw a net profit margin as high as 29% was at the close of Q4 2010. From there, margins took a nearly decade-long downward dip to 11.42% at the close of Q4 2017.
It will be interesting to see where Alphabet’s net profit margin goes from here — will it continue to climb upwards, or will the company begin to see another downward trend? History suggests the peak might be in and a decline in the offing.
International Growth
While much of this discussion of Alphabet valuation has been rooted in the United States, it’s necessary to consider how the company has been doing internationally and assessing whether or not there’s potential for impressive growth globally as well as in the U.S.
Scrutinizing Alphabet’s annual reports, it seems that Alphabet is likely to see some significant growth in the emerging markets of China and India. Just look at how mobile payment software Google Pay performed in India during its first six months: The app saw over $1 billion in transactions in just half a year after being rolled out.
Alphabet’s work with artificial intelligence, quantum computing, and self-driving vehicles also shows extreme potential for international growth. The success of these initiatives have global implications and will likely be used around the world upon its respective completions, which would most definitely see Alphabet grow significantly.
The company’s business model thrives on innovative technology with universal appeal, which makes international growth practically a guarantee as long as the company continues to fire on all cylinders — and, of course, there’s no reason to expect anything out of the ordinary in this regard. Alphabet’s international growth is inherent to the company’s business model.
Alphabet Discounted Cash Flow Forecast
One of the final steps in assessing Alphabet’s valuation is the discounted cash flow forecast. This involves looking at projected revenues, operating costs, and profits well into the company’s future.
By the close of 2021, it’s expected that Alphabet’s annual revenue will top $217.797 billion dollars with a cash flow of $77.45 billion and a capital expenditure of $22.28 billion.
Looking ahead to 2022, Alphabet’s looking at a projected annual revenue of $259.882 billion with a cash flow of $92-41 billion and a capital expenditure of $35.51 billion.
With this in mind, Alphabet’s fair value comes out to be $3,038.23 per share. However, the consensus view among analysts is for a share price of $3,302.
The Bottom Line: Alphabet Valuation
There are numerous factors that go into the valuation of a company. This is no different when it comes to a company as sizable and respected as Alphabet. There’s no doubt that there’s a lot of work and thought that goes into each of these valuation measures, but it’s for a good reason: valuation gives investors and traders a good idea of whether or not a company is worth investing in. The more valuation measures you assess, the more confident you’ll be in your decision to buy, to hold, or to sell a company’s stock.
All in all, Alphabet has proven itself again and again to be a sturdy, dependable stock to invest in. From its market cap and enterprise value to its price/sales and price/book ratios and everything in between, there are few valuation measures that put Alphabet in a bad or risky light.
Its business model is sound and well-suited for continued future growth, and its array of growth drivers are helping to further diversify Alphabet’s revenue and earnings. While the company surely has some competitors in its midst, Alphabet has shown that it has the operational competence and leadership to keep these threats at bay through continued innovation and growth.
When all is said and done, Alphabet is an enormous company hovering around a $2 trillion dollar valuation — this would put it alongside only two other U.S. companies to reach this mark (Apple and Microsoft). Looking forward to the future, there’s no doubt whatsoever that Alphabet will be able to reach this milestone, then far exceed it in the years and the decades to come.
A valuation of $5 trillion might at first glance seem outlandish but inflation alone should cause it to reach that price in the next two decades. And at the rate it’s been growing, another decade might be all that’s needed to hit that milestone.
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