Piper Sandler analyst Thomas Champion reiterated an Overweight rating on Alphabet Inc
Champion expects GOOGL will be an AI winner. Shares have outperformed despite the onset of a DOJ trial and seemingly ramping infrastructure investment.
The market may say that new product opportunities are forthcoming, and valuation remains undemanding.
To align his forecasts with his latest views, Champion raised CAPEX Google Cloud revenue for FY24E and FY25E and tweaked higher near-term YouTube revenues.
The analyst raised CAPEX to account for updated purchase commitment disclosure in filings. Commentary suggests this is due to further AI and data center investments.
He has not seen a spike in capex, but this may be due to capacity issues. History suggests caution. FY24E CAPEX moves +16% and FY25E +22%.
AI is driving new opportunities as well. Core Search now includes Gen AI searches. Duet is being trialed and could drive new Cloud revenue: ~250bps penetration on an estimated ~150 million paid Workspace users implies ~3% upside to his FY25E Cloud forecast.
Gemini may prove another catalyst. To account for this potential, Champion raised FY24E Cloud revenue by +2% and FY25E by +5%.
YouTube also looks strong based on his checks. Champion raised 3Q/4Q estimates to account for better growth.
While the current valuation does not radiate AI winner, the bear case looks increasingly tenuous. Search share loss has not materialized.
GOOGL stock is trading at a near-market multiple on P/E and ~10% discount to the historical average on NTM FCF. Some AI peers trade at a material historical premium.
Looking ahead, Champion sees an improving picture for core Search and new Cloud/AI revenue streams emerging.
Champion projects Q3 revenue of $75.24 billion vs. consensus $75.91 billion and EPS of $1.44 vs. consensus $1.44. He estimates Q4 revenue of $84.69 billion vs. consensus $84.84 billion and EPS of $1.57 vs. consensus $1.61.
The analyst projects FY23 revenue of $304.32 billion vs. consensus $304.71 billion and EPS of $5.68 vs. consensus $5.65.
Price Action: GOOG shares traded lower by 1.23% at $133.54 on the last check Tuesday.
