In a recent segment on Squawk Box, Michael Nathanson, founding partner and senior research analyst at MoffettNathanson, discussed Alphabet’s Q1 earnings, which exceeded expectations despite concerns about competition and market dynamics. Nathanson noted that there has been ongoing anxiety regarding Alphabet’s growth, particularly with the rise of AI technologies like ChatGPT. However, he highlighted that Alphabet has maintained double-digit growth in its search segment for seven consecutive quarters, indicating resilience in its core business.
Nathanson acknowledged that while the growth is impressive, there are valid concerns about potential deceleration in the future. He pointed out that the search market has been established for over two decades, and while current growth rates are not forecasted to continue indefinitely, Alphabet’s diversification into other business areas, such as YouTube and cloud services, could mitigate the impact of any slowdown. He emphasized that the market’s current valuation of Alphabet does not reflect its potential, suggesting that the company is undervalued.
When discussing Alphabet’s stock price, which is currently around $165, Nathanson estimated its worth to be around $210 per share. He argued that the market is applying a lower multiple to Alphabet compared to the overall S&P 500, which he believes is unjustified given the company’s diverse revenue streams. He highlighted YouTube’s significant revenue growth and the potential for its cloud services to accelerate, alongside the untapped value of Waymo, Alphabet’s autonomous vehicle division, which he believes is not currently factored into the stock price.
Nathanson also addressed Alphabet’s capital expenditures, noting that the company is likely to continue investing in AI infrastructure and cloud capabilities as long as revenue growth supports it. He pointed out that the growth in cloud services is currently constrained by capacity issues, but as Alphabet expands its data centers and chip availability, it could see further acceleration in this area. He emphasized that the monetization of AI within search and YouTube is already proving effective.
Lastly, Nathanson expressed uncertainty about the potential impact of external factors, such as tariffs and economic conditions, on advertising revenues for Alphabet and its competitors. He acknowledged that while there hasn’t been a noticeable slowdown yet, rising input costs and changing consumer spending patterns could eventually affect advertising budgets. He concluded by reiterating the importance of monitoring these external factors while remaining optimistic about Alphabet’s long-term growth prospects.
