PhillipCapital has downgraded its call on Alphabet Inc (Google) from “buy” to “accumulate” at a raised target price of US$154 ($207.18) from US$144 previously, following the company’s 4QFY2023 ended Dec 31, 2023.
Analyst Jonathan Woo’s target price is based on a discounted cash flow (DCF) model following an additional rolled-over year of valuations, with an unchanged weighted average cost of capital (WACC) of 7.3% and terminal growth rate of 3.5%.
For the period, Google’s advertising revenue improved sequentially and 11% y-o-y to US$65.5 billion, driven largely by search and YouTube ads at 13% y-o-y and 16% y-oy respectively.
Particularly, retail strength in the Asia-Pacific (APAC) region was a standout, particularly with small and medium businesses (SMBs), which was the company’s fastest-growing channel.
In his Feb 2 report, Woo notes that artificial intelligence (AI) continues to drive higher conversions per dollar for advertisers and incremental query growth from customers, through Google’s products like its performance max and search generative experience.
“We expect AI to continue driving most of the gains in advertising by creating, increasing return on investment (ROI) and value for advertisers, and wider accessibility for customers like SMBs,” he adds.
Meanwhile, continuing from previous quarters, monetisation via YouTube shorts has been progressing well as viewership continues to expand. Currently, YouTube shorts have some 2 billion monthly active users (MAUs) and around 70 billion average daily views.
Similarly, YouTube Music and premium subscriptions are also scaling well, with an annualised run rate of US$15 billion.
Woo writes: “ 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 around 20% to 25% y-o-y subscription growth in FY2024 given the growing user base of YouTube on connected TV.”
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On a more bearish note, Google ended 4QFY2023 with US$11 billion in capital expenditure (capex), a 45% y-o-y increase.
For FY2024, the company also expects “notably larger” levels of capex as it remains focused on developing its technical infrastructure such as servers and data centres to support AI development.
Following this, the analyst notes that he is “modelling” for an around 20% y-o-y increase in Google’s capex for this fiscal year, against his previous estimates of around 6% y-o-y.
Outlook
AI remains the driving force behind the company’s latest product innovations like the new multimodal large language model (LLM), Gemini, and powering products like Bard, Search Generative Experience (SGE), and Duet AI, enabling SMBs to compete with larger brands in advertising, also seen in how SMBs are Google’s fastest-growing channel within advertising.
Google Cloud is another bright spot for the company, with cloud growth accelerating to 26% y-o-y in 4QFY2023 from 3QFY2023’s 22% y-o-y growth. With 70% of the world’s 1,000 largest companies using Google Cloud, it remains the company’s fastest-growing business.
“Cost optimisation on the part of Cloud customers seems to have been worked through, with the additional excitement surrounding AI a key factor in driving interest and early adoption for Google’s cloud services. We expect cloud growth to remain around 20% to 25% y-o-y for FY2024, driven by these AI tailwinds,” opines Woo.
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Overall, the analyst has cut his FY2024 profit after tax and minority interest (patmi) by around 5%, following the company’s increase in research and development (R&D) investments in AI, and raised his capex for the period by around 10% due to the scaling of its tech infrastructure.
He concludes: “We expect Google to remain as the market leader in digital advertising by leveraging AI for product improvements and efficiencies, while also being well positioned to capture more eyeballs through YouTube and connected TV.”
As at Feb 5, shares in Alphabet Inc closed US$1.39 higher or 0.97% up at US$144.93.
