Rapport Morningstar GOOG

Morningstar Equity Analyst Report | Report as of 26 Jul 2023 02:37, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 23
Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC
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Last Price Fair Value Estimate Price/FVE Market Cap Economic Moat Moat Trend Uncertainty Capital Allocation ESG Risk Rating Assessment1
122.79 USD 161.00 USD 0.76 1.55 USD Tril Wide Stable High Exemplary ;;;;;
25 Jul 2023 5 Jul 2023 05:00, UTC
25 Jul 2023 24 Jul 2023 17:52, UTC
Price vs. Fair Value
Fair Value: 161.00

24 Jul 2023 17:52, UTC
200
Last Close: 122.79
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.80 1.03 0.88 0.83 0.55 0.76 Price/Fair Value
-1.03 29.10 31.03 65.17 -38.67 38.39 Total Return %
Morningstar Rating
Total Return % as of 25 Jul 2023. Last Close as of 25 Jul 2023. Fair Value as of 24 Jul 2023 17:52, UTC.
Contents
Analyst Note (26 Jul 2023) Alphabet Earnings: Google Search and YouTube Growth
Business Description
Business Strategy & Outlook (24 Jul 2023) Doubts Are Subsiding; Shares Remain Attractive
Bulls Say / Bears Say (24 Jul 2023)
Analyst Note Ali Mogharabi, Senior Equity Analyst, 26 Jul 2023
Economic Moat (24 Jul 2023)
Fair Value and Profit Drivers (24 Jul 2023)
We maintain our $161 fair value estimate on wide-moat Alphabet and continue to view it as attractive.
Risk and Uncertainty (24 Jul 2023) Growth in search and cloud, plus a turnaround in YouTube drove the firm’s impressive second-quarter
Capital Allocation (24 Jul 2023) revenue growth.
Analyst Notes Archive
Financials Accelerating growth in Google’s core search business demonstrated that the segment’s network effect
ESG Risk moat source is intact despite threats from Microsoft and OpenAI. Also, as we expected, YouTube ad
Appendix
revenue returned to growth due to a more balanced mix of broad-based and direct response ad
Research Methodology for Valuing Companies
demand, improvement in YouTube Shorts monetization, and increasing demand for ads on connected
Important Disclosure
TVs. We were surprised by another revenue decline in Google’s advertising technology offerings, but
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and expect that segment to improve as economic uncertainty lessens and ad spending across the internet
Investment Research Policy. For information regarding conflicts of interest, please
visit: http://global.morningstar.com/equitydisclosures. picks up.
The primary analyst covering this company does not own its stock.
Google’s cloud momentum continued with impressive top-line growth and margin expansion. While
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. management remained cautious about future cloud growth, we look for revenue acceleration driven
mainly by increasing demand for artificial intelligence tools and features.
Total second-quarter revenue came in at $74.6 billion, up 7% from last year. Advertising revenue
returned to growth (up more than 3%) after two consecutive quarters of a decline, with improvements in
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Morningstar Equity Analyst Report | Report as of 26 Jul 2023 02:37, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 23
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both search (up 5.6%) which was driven by strength in retail, and YouTube (up 4.4%), partially offset by
the ongoing weakness in advertising technology revenue (down 5%). Cloud revenue increased 28% and
other services, which includes hardware and Google Play, was up 10%.
Sector Industry
Internet Content &
i Communication Services
Information Operating income of $21.8 billion (29% margin) was higher than last year’s $19.5 billion (28% margin)
Business Description helped by a slight decline in traffic acquisition cost as a percentage of advertising revenue and the
Alphabet is a holding company. Internet media giant longer useful lives assumed for servers and other hardware, which resulted in lower depreciation
Google is a wholly owned subsidiary. Google generates expense. Lower sales, marketing, general, and administrative expenses as a percentage of revenue also
99% of Alphabet revenue, of which more than 85% is
contributed to the higher operating margin.
from online ads. Google’s other revenue is from sales of
apps and content on Google Play and YouTube, as well
Business Strategy & Outlook Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023
as cloud service fees and other licensing revenue. Sales
of hardware such as Chromebooks, the Pixel
Alphabet dominates the online search market with 90%-plus global share (80%-plus U.S. share) for
smartphone, and smart home products, which include Google, via which it generates strong cash flow. We expect continuing search growth as we remain
Nest and Google Home, also contribute to other revenue. confident that Google will maintain its leadership despite Microsoft moving first to include generative
Alphabet’s moonshot investments are in its other bets artificial intelligence in Bing search. We also foresee YouTube and cloud contributing more to the firm’s
segment, where it bets on technology to enhance health
top and bottom lines. Finally, we view investments in “moonshots” as attractive, with significant
(Verily), provide faster internet access (Google Fiber),
uncertainty but also substantial upside.
enable self-driving cars (Waymo), and more.
Google’s ecosystem strengthens as its products are adopted by more users, making its online
advertising services more attractive to advertisers and publishers and resulting in increased online ad
revenue. We think ad revenue can continue to grow at high-single-digit rates during the next five years.
The firm utilizes technological innovation to improve the user experience in nearly all its Google
offerings, while making the sale and purchase of ads efficient for publishers and advertisers. Adoption
and usage of mobile devices has been increasing. The online advertising market has taken notice and
has followed its target audience onto the mobile platform. We have seen Google partake in this on the
back of its Android mobile operating system’s growing market share, helping it drive revenue growth
and maintain its leadership in the space.
Among the firm’s investment areas, we particularly applaud the efforts to gain a stronger foothold in the
fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to
creating and maintaining its private cloud platform to increase its market share in this area, driving
additional revenue growth and creating more operating leverage, which we expect will continue. Most
of Alphabet’s more futuristic projects are not yet generating revenue, but the upside is attractive if they
succeed, as the firm is targeting newer markets. Alphabet’s autonomous car technology business,
Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of
billions of dollars within the next 10-15 years.
Bulls Say Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023
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Competitors
Alphabet Inc Class C GOOG Amazon.com Inc AMZN Apple Inc AAPL Microsoft Corp MSFT
Fair Value Fair Value Last Close

161.00 137.00 193.62 Last Close
Uncertainty : High Uncertainty : High 350.98
Last Close Fair Value Fair Value
Last Close 129.13 150.00 325.00
122.79 Uncertainty : High Uncertainty : Medium
Economic Moat Wide Wide Wide Wide

Moat Trend Stable Stable Stable Stable
Currency USD USD USD USD
Fair Value 161.00 24 Jul 2023 17:52, UTC 137.00 3 Feb 2023 05:12, UTC 150.00 20 Jan 2023 17:37, UTC 325.00 26 Apr 2023 04:03, UTC
1-Star Price 249.55 212.35 232.50 438.75
5-Star Price 96.60 82.20 90.00 227.50
Assessment Under Valued 25 Jul 2023 Fairly Valued 25 Jul 2023 Over Valued 25 Jul 2023 Fairly Valued 25 Jul 2023
Morningstar Rating QQQQ25 Jul 2023 21:20, UTC QQQ25 Jul 2023 21:20, UTC QQ25 Jul 2023 21:20, UTC QQQ25 Jul 2023 21:20, UTC
Analyst Ali Mogharabi, Senior Equity Analyst Dan Romanoff, Senior Equity Analyst Brian Colello, Sector Director Dan Romanoff, Senior Equity Analyst
Capital Allocation Exemplary Exemplary Exemplary Exemplary
Price/Fair Value 0.76 0.94 1.29 1.08
Price/Sales 5.47 2.52 8.07 12.38
Price/Book 5.80 8.57 48.99 12.65
Price/Earning 25.96 307.45 32.82 36.26
Dividend Yield — — 0.48% 0.76%
Market Cap 1,545.12 Bil 1,321.53 Bil 3,031.71 Bil 2,566.06 Bil
52-Week Range 83.45—129.55 81.43—146.57 124.17—198.23 213.43—366.78
Investment Style Large Growth Large Growth Large Growth Large Growth
u As the number of online users and usage increase, so will digital ad spending, of which Google will
remain one of the main beneficiaries.

u Android’s dominant global market share of smartphones leaves Google well positioned to continue
generating top-line growth as search traffic shifts from desktop to mobile.

u The significant cash generated from the Google search business allows Alphabet to remain focused on
innovation and the long-term growth opportunities that new areas present.
Bears Say Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

u There is little revenue diversification within Alphabet, as it remains heavily dependent on Google and
the state of the search ad space.

u Alphabet is allocating too much capital toward high-risk bets, which face a very low probability of
generating returns.
u Google’s dominant position in online search is not maintainable, as more companies and regulatory
agencies are contesting the methods through which the company has been extending its leadership.
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Economic Moat Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

We assign Alphabet a wide moat rating, thanks to durable competitive advantages derived from the
company's intangible assets, as well as the network effect.
We believe Alphabet holds significant intangible assets related to overall technological expertise in
search algorithms and artificial intelligence (machine learning and deep learning), as well as access to
and accumulation of data that is deemed valuable to advertisers. We also believe that Google's brand is
a significant asset; "Google it" has become eponymous with searching, and regardless of actual
technological competency, the firm's search engine is perceived as being the most advanced in the
industry. While with Microsoft's Bing is attempting to dethrone Google with AI technology from OpenAI,
we think the firm can defend its dominance in search with its own AI technology, some of which
OpenAI's products are based on.
In our opinion, Alphabet's network effects are derived mainly through its Google products such as
Search, Android, Maps, Gmail, YouTube, and more. Ultimately, we view Google's network as
heterogeneous. On the one side, all the products Google offers have provided it with a massive
consumer base that allows the company to collect data. On the other side, via its rich collection of data
and large user base, Google can offer the best return on investment for advertisers and build a growing
network of advertising customers. The addition of each new ad and advertiser improves the efficiency of
Google's programmatic advertising offerings, allowing the firm to better monetize the network.
In search, Google has successfully and consistently monetized many of its technology-based intangible
assets, from the original algorithms behind search to the current machine learning ones and the deep
learning-based generative artificial intelligence (generative AI), which are also being applied to nearly
every product. The company was recognized first for its "extremely relevant results" by PC Magazine in
December 1998. From that point, it grew into the world's most popular online search engine and has
maintained its leadership. Google processes more than 3 times and 4 times as many search requests as
Bing (Microsoft) and Yahoo, respectively. Google Search's success stems from the relevance of its
results to its users and the likelihood that this relevance will improve as more data is gathered and
analyzed, assumptions are generated, and predictions are created. Google has used machine learning
technology to improve the user experience.
The company has applied machine learning to Search (speech recognition), Gmail (Smart Reply), Google
Photos, Maps, and many other products, including its cloud offerings. As technological advancements
improve the user experience for each product, the likelihood of further usage increases. The firm is also
applying generative AI to enhance its search engine's communication and response with users.
Products with those features include Bard and the Search Generative Experience, or SGE, which the firm
is testing in its Search Labs. With generative AI in search, while clicks will likely decline, the search
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engine will have more data regarding user's interest, which it can use for contextual campaigns for
advertisers.
Based initially on its technology, Google has successfully increased its users' dependence on its
products to keep transforming the usage of those products into something habitual. We have seen that
with online search, as most people around the world continue to "Google it." It has strengthened its
brand, which we think has longevity. We view the Google brand as a significant driver of user growth
for YouTube, Maps, Gmail, and Chrome. Again, an expanding user base helps the company collect more
data, which is monetized when applied to online ads.
Google search's large and growing user base has created a network difficult to replicate, in our view.
We believe that an additional search on Google's search engine creates value for other users, as well as
for advertisers and businesses. With AI (machine learning and deep learning) technology, more requests
made by current and/or new users improve relevancy of search results, creating value for users. More
relevant results also decrease the likelihood of users jumping to another search engine, creating
somewhat of a barrier to exit.
For advertisers, value is created mainly through growth of the large user base to target and from
behavioral data compiled and analyzed. As users and search requests grow and more data is gathered,
advertisers' demands for ads increase, helping Google to further monetize the network. We think this
can be strengthened in the long run with the application of generative AI.
As with Google Search, we see network effects from large and growing user bases of other products,
such as Maps, Gmail, and Chrome, all of which create value for users and advertisers. As more
consumers use Maps, more data regarding traffic, commuting tendencies, and so forth is gathered,
helping Google generate more accurate results (in terms of locations, travel times, and route
suggestions). Google also utilizes such data to provide faster routes. Businesses and advertisers pay
Google to place their search ads, targeted based on users' locations and previous searches, within
Maps' search results list and directly on the map.
Google's Chrome browser remains the market leader with nearly a 63% share, according to StatCounter,
compared with over 20% for Apple's Safari and 5% for Microsoft's Edge. In our opinion, growth in
Chrome browser usage helps increase the network effect for Google. In addition, by launching Android
in 2007, Google positioned itself well in the faster-growing mobile ad market, maintaining its online
search dominance and strengthening its network effect. According to IDC, Google's Android OS powers
more than 87% of smartphones around the world, compared with Apple iOS' slightly over 12%. With
Google's Chrome browser on Android phones, more mobile searches are conducted using Google. We
note, however, that Google makes annual payments to Apple and Samsung for its search engine to be
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the default option on their mobile devices.
Android's network effect also creates more value for users. As the number of Android-powered
smartphones increases, more developers will create more apps to be made available on Google Play and
run on those smartphones, creating additional value for Android smartphone users.
We think YouTube is also valuable, as it benefits from a network effect that creates value for users,
content creators, and advertisers. With more viewers on the site today, more content creators will look
to YouTube for content distribution. Continuing growth of YouTube's content library drives further
viewer growth. YouTube's video platform has more viewers than other online video properties, making it
attractive for advertisers.
We expect Google to gain a foothold in the growing enterprise cloud market, but we do not think its
cloud offerings create a network effect. Although Amazon is clearly the leader in this space, we expect
Google to gain further traction and trail only Amazon Web Services and Microsoft's Azure in market
share. Ultimately, we believe Google can leverage the technological expertise (including machine
learnings and deep learning AI) it applied to creating and maintaining its private cloud platform to build
and maintain public cloud platforms for many businesses.
Regarding other potential moat sources, we do not believe Alphabet has a durable cost advantage
when compared with its peers. Alphabet's size allows it to invest heavily in Maps and YouTube, and
perhaps in more capital-intensive businesses like enterprise cloud or Google Fiber. However, we don't
see an inherent cost advantage in Alphabet that other tech titans like Apple and Amazon can't replicate,
especially since cloud hardware is becoming increasingly commodified.
We believe that customer switching costs provide Alphabet with only a negligible competitive
advantage. Alphabet's Google offerings, such as search, YouTube, Android, Maps, and Gmail, have
some switching costs associated with time and effort needed to learn a new user interface, move
content to another platform (YouTube) and notify contacts of an email change (Gmail), but such costs
are not so prohibitive that these customers are locked in forever.
Finally, while Alphabet generates economic profit through Google, which we think will continue, this
profit would be higher were it not for Alphabet's efforts to remaining a step ahead in terms of
innovation. In its other bets segment, Alphabet is betting on (or investing in) using technology to
enhance health (Verily), self-driving cars (Waymo), and much more. Some of these wagers may not
bring in any winnings, and we believe it is too early to consider these businesses as contributors to
Alphabet's economic moat, either in terms of intangible assets or network effects.
Fair Value and Profit Drivers Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023
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Our fair value estimate is $161 per share, equivalent to a 2024 enterprise value/EBITDA ratio of 17. We
expect margin pressure in 2023 given the firm’s aggressive hiring in 2022, continued investments in
growth initiatives, and the slight short-term impact from Microsoft Bing and generative AI. We look for
margin improvement in 2024-27, driven by better generative AI search monetization and faster growth
in cloud driven by wider adoption of generative AI. Our model assumes a five-year compound annual
growth rate of nearly 11% for total revenue and a five-year average operating margin of 24%.
We expect advertising revenue to remain over 70% of Alphabet’s total revenue, driven by continuing
growth in overall digital ad spending, albeit at a much slower rate than historically. We model nearly 6%
ad revenue growth for 2023 due to economic uncertainty. We have estimated total Google ad revenue
of $233 billion and $247 billion in 2023 and 2024, respectively. We think YouTube will contribute about
13% of Google’s advertising revenue in 2023, similar to 2022, and 14% in 2024. YouTube growth should
benefit from its impressive reach and usage frequency, plus its video-only content format, which is
attractive to brand advertisers.
We believe Google will continue to gain traction in the cloud market (23% annual revenue growth
through 2027). We see Google’s other revenue (non-ad YouTube revenue, Google Play Store, and sales
of hardware products), up 12% in 2023 (due to strong growth in YouTube Premium, Music, and TV
subscriptions) and up 20% in 2024.
Although Alphabet does not break out revenue for its other bets segment, we assume Fiber and Verily
generate most of this revenue, as commercialization of Waymo is in its early stages. Our total other bets
revenue estimates for 2023 and 2024 are nearly $1 billion and $1.1 billion.
We model 52.5% and 53% gross margins for 2023 and 2024, respectively, compared with 55% in 2022,
due to the higher cost of YouTube content, higher headcount, and possible impact of the inclusion of
generative AI (Bard and/or SGE) on search margin. We expect the growth of other operating expenses
to decelerate in the coming years mainly due to much slower growth in headcount, helping offset gross
margin pressure. As a result, we expect the operating margin to increase to nearly 26% in 2027 from
26.5% in 2022 and 22% in 2023.
Risk and Uncertainty Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023
Our Morningstar Uncertainty Rating for Alphabet is High, primarily the result of high dependency on
continuing online advertising growth. While we remain confident that Google will maintain its dominant
position in the search market, a long-lasting downturn in online ad spending could have a negative
impact on Alphabet’s revenue and cash flow, resulting in a lower fair value estimate. On the other hand,
positive returns on Alphabet’s investments in cloud and moonshots could increase our fair value
estimate considerably.
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Although the moat sources of intangible assets and network effect will help Google retain its
competitive advantages, minimal switching cost to utilize a rival search engine remains a risk for the
company. This risk remains manageable, in our view, as Microsoft’s Bing, the nearest competitor and
the first-mover in enhancing search with generative AI capabilities, currently does not have significant
presence in the mobile market, which is one of the main growth drivers of the search ad market. Google
also has generative AI technology to defend its over 90% global search market share.
The firm’s high dependence on user behavior data also represents an environmental, social, and
governance risk, mainly due to risks related to data privacy and security, which could affect not only
Google’s advertising business but also users’ trust in the firm’s products as data can be misused.
Google faces antitrust pressure and various claims and investigations brought by different companies
and regulatory agencies regarding search bias and its overall market dominance in online advertising.
Some governments may simply forbid access to some of Google’s properties, which could result in lower
user growth and monetization. Similar to Meta, Google also faces limitations in mergers and
acquisitions as the U.S. and other countries attempt to lessen the firm’s dominance in advertising and
the overall internet market.
Capital Allocation Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

We assign Alphabet a Morningstar Capital Allocation Rating of Exemplary.
The balance sheet remains sound. As the overall digital advertising market continues to mature,
Alpahbet’s main source of revenue is becoming more cyclical. With more than $115 billion in cash and
cash equivalents and only around $14 billion in debt (as of the end of first quarter 2023), Alphabet’s
leverage ratios remain very low. We think continuing growth in Google’s business-to-business segment,
Google Cloud, will help offset this cyclicality. Alphabet’s strong network effect moat source should
create operating leverage, albeit partially offset by increased legal and other costs related to data
privacy and security issues, along with lobbying on the antitrust front. In any case, Alphabet’s financial
health is virtually assured.
On the investment front, we view the firm’s decisions as exceptional. Alphabet’s R&D investments
(which have been growing at 15% in the last three years) remain at around 14%-16% as a percentage of
revenue. Microsoft’s addition of generative AI features to Bing search is only the most recent possible
technology disruption that supports our view that Google’s continuing high R&D investments are
justified. While the firm is not the first to commercialize its generative AI capabilities, we consider
Google as a front-runner in AI. In
fact, generative pre-training transformer, or GPT, the technology created by OpenAI and used by
Microsoft Bing, is based on an architecture that Google developed in 2017, which is widely used by
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other AI technology providers. In addition, Google has developed various technology which have similar
capabilities to GPT and other AI-based products.
Alphabet also continues to invest in various high-risk and high-reward projects, which if successful
could generate significant returns for the company. Investment in autonomous vehicle technology
(Waymo), is just one example. It appears that management aims to remain ahead of the pack by
acquiring valuable assets to utilize and build upon, as it did with Android, YouTube, DoubleClick,
AdMob, Motorola Mobility, Looker, and Fitbit. Management likely will continue making acquisitions and
investments in futuristic projects, including artificial intelligence.
In terms of shareholder distributions, Alphabet does not currently pay a dividend but it has implemented
share-repurchase programs consistently. The firm repurchased shares totaling $18.4 billion, $31.1
billion, $50.3 billion, and $59 billion in 2019, 2020, 2021, and 2022, respectively.
In late 2015, Alphabet became a holding company, with Google as one of its wholly owned subsidiaries.
Alphabet is also the parent company of other businesses, mostly moonshots, which are grouped into the
other bets segment that includes Waymo. This structure has provided slightly more transparency to
shareholders, as the company’s mature cash-generating business, Google, is managed separately. In
our opinion, such a move may indicate that management is considering some form of redistribution of
cash generated by Google to shareholders a few years down the road.
Under this structure, Larry Page, who co-founded Google and is a director, was the CEO of the parent
company Alphabet. Sergey Brin, the other co-founder of Google and a director of Alphabet, was the
president of the firm. In December 2019, Page and Brin left their roles (but remained on the board) and
Sundar Pichai, the CEO of Google, also became the CEO of Alphabet. Pichai joined Google in 2004 and
was its product chief before becoming CEO in 2015. Susan Wojcicki, who has been with Google since
1999 and convinced Google to acquire YouTube, became CEO of YouTube in 2014. Thomas Kurian,
former president of Oracle’s product development group, became the CEO of Google Cloud in 2019. Ruth
Porat is the CFO of Alphabet and Google. She was CFO at Morgan Stanley before coming to Alphabet in
2015.
Although management’s decisions have generated exceptional returns for shareholders in the past, and
are likely to continue doing so, we remain watchful regarding the high concentration of voting power.
Page, Brin, and former CEO and former executive chair Eric E. Schmidt still have more than 55% voting
power. In addition, given Alphabet’s multiclass share structure, it appears that this high concentration
of power will remain intact in the long run, which could result in a significant conflict of interest if the
cofounders and Schmidt, who is no longer with the firm, make too many high-risk wagers on futuristic
projects. However, we have not seen any indications of this.
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Analyst Notes Archive
Alphabet Earnings: Search and Cloud Drive Some Growth While We Await Recovery in YouTube and
Network Ali Mogharabi, Senior Equity Analyst, 26 Apr 2023
We are maintaining our $154 fair value estimate for Alphabet following first-quarter results. We were
impressed by Google Search advertising revenue growth; continuing strength in the cloud business,
which is making headway toward profitability, likely next year; consolidated margin expansion for the
first time in three quarters; and the latest authorized share buyback. However, YouTube Shorts
continues to pressure overall YouTube advertising revenue. Economic uncertainty pushed network ad
revenue lower. Plus, increasing competition on the artificial intelligence side, whether in the cloud or
the advertising segment, is forcing the firm to keep investing in enhancing computing capabilities.
Nevertheless, we believe Alphabet has the necessary technology and talent to successfully battle AI
competitors, especially on the search side.
Overall, we believe Alphabet is well positioned to benefit from an improving economic climate, which
will accelerate ad spending. On the bottom line, while capital expenditure will not go down this year,
the firm’s focus on efficiency should help expand margins beginning in 2024. We continue to view this
wide-moat firm as undervalued.
Alphabet generated $69.8 billion in total revenue during the first quarter, up 2.6% year over year.
Advertising revenue declined less than 1% from last year due to continuing weakness in YouTube and
network ad revenue, offset by 1.9% growth in search. We continue to expect YouTube ad revenue
growth to pick up in the second half of the year as YouTube Shorts monetization improves and economic
uncertainty lessens. In our view, uncertainties are currently driving advertisers to purchase more on
walled-garden properties such as Google’s as they continue to attract users, which then reduces
demand for Google’s ad tech offerings to place ads on general internet sites, affecting network revenue.
Alphabet: Losing Default Status on Samsung Devices May Not Be Significant Ali Mogharabi, Senior
Equity Analyst, 17 Apr 2023
We are maintaining our $154 fair value estimate on Alphabet. According to The New York Times,
Samsung is considering changing the default search engine on its devices from Google to Microsoft’s
Bing for the first time in 12 years. While Google is facing increasing competition and disruption in the
online search market, mainly because of the emergence of artificial intelligence, we think it can
maintain its network effect moat source. First, we have not seen indications of search market share loss
since the release of OpenAI’s ChatGPT (November 2022) and Microsoft’s AI chat feature in Bing
(February 2023). According to Statcounter, Google’s market share has not been affected through April.
Plus, even before becoming the default search engine on Samsung devices 12 years ago, Google’s share
was around 90% and has remained between 90% and 95%.
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Second, while Microsoft may have a first-mover advantage in AI-powered chatbot in search, we think
Google has the AI technology expertise to launch competitive AI-based features. As stated in the Times
article, Google has already begun to further prioritize AI features and possibly create a new search
service. With various large language models at hand, we think Google can improve the Bard chatbot
and add more features gradually.
Third, the $3 billion that according to the Times article Google is paying Samsung, has not changed
much as several sources have reported in the past that Google was paying Samsung around the same
figure in 2017. We think Google likely will increase that amount to stay as the default search on
Samsung devices.
Last, the possibility of such a change may help Google in its search case versus the U.S. Department of
Justice, which could allow the firm to make more aggressive acquisitions and compete more effectively.
Potential TikTok Ban in U.S. and Reports About a Sale Benefit Google, Meta, and Snap; FVEs
Unchanged Ali Mogharabi, Senior Equity Analyst, 17 Mar 2023
The Joe Biden administration is threatening to ban TikTok from the U.S. and talks about a possible sale
of its U.S. operations to an American company have increased. At the same time, China may not
approve a sale, as reported by The Information. In our view, the uncertainty surrounding the possible
ban or sale of TikTok could benefit Snap, Meta’s Instagram, and Google’s YouTube. We are maintaining
our $154, $260, and $16 fair value estimates for Alphabet, Meta, and Snap, respectively.
First, this uncertainty could push some TikTok content creators to focus more on, and possibly begin,
pushing their audiences to other social network platforms. Obviously, if a ban is approved and enforced,
the content, user count and engagement, and likely ad dollars for Snap, Instagram, and YouTube will
increase.
Second, before any deal can be executed, there will be questions about whether TikTok’s powerful
algorithms, which were developed by engineers at ByteDance, can be used after the deal, or must be
completely rebuilt. Any interruption or decline in the quality of TikTok’s ability to provide relevant and
engaging content could push its users and creators to spend more time on other platforms.
And third, Meta could be the main beneficiary of a TikTok sale as an increased focus on the presence of
a formidable competitor like TikTok may reduce antitrust pressure on Meta and weaken the Federal
Trade Commission’s case. Plus, per Meta's user count, the presence of TikTok has not affected Meta's
network effect. For Snap, which has a weaker network effect than Meta, a possibly more trusted U.S.
TikTok may make it more difficult to attract users away from, or keep them from migrating to, TikTok.
However, the firm's North America user count has continued to grow even after the coronavirus
pandemic.
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Our Initial View of the Impact of Silicon Valley Bank’s Ordeal on Our Coverage List; No FVE Changes
Ali Mogharabi, Senior Equity Analyst, 13 Mar 2023
The collapse of Silicon Valley Bank has created doubt about access to capital for tech firms, but we do
not expect any material impact on online media or advertising firms under our coverage and we are not
adjusting our fair value estimates on these stocks. The chance of Silicon Valley Bank becoming a
contagion did decline a bit as of March 12. While a second bank, Signature Bank, was closed,
regulators announced that all deposits at both banks will be accessible beginning on March 13.
Based on previous filings and communication with some of the firms, DoorDash, Snap, PubMatic, and
Uber have some exposure to Silicon Valley Bank but none is material. While we could not find Silicon
Valley Bank mentioned in Pinterest filings, the firm’s “no comment” response to us raises some flags.
We hope Pinterest will clarify that response as, based on some reports, it may have some exposure,
although not clear if it is material.
We think Google’s cloud revenue could be affected, although by less than 10%, as the health of some
startups and other tech clients remains in question. With the assumption of a gradual recovery in
venture capital financing in 2024 and beyond, the impact of this headwind would result in only a 3% cut
to our Alphabet fair value estimate.
If Silicon Valley Bank becomes a contagion, the effect on startups and smaller businesses could
increase, which may further hurt the cloud space and possibly Google. We could also see a decline in ad
spending by smaller businesses which could pressure the revenue growth of more firms under our
coverage. However, again, actions taken by regulators have lowered the chances of such a scenario
occurring.
Macroeconomic Headwinds Keep Pressure on Alphabet’s Advertising; Cloud Remains Bright Spot;
$154 FVE Ali Mogharabi, Senior Equity Analyst, 3 Feb 2023
We are reducing our fair value estimate for Alphabet to $154 (from $160) as the firm’s fourth-quarter
results displayed the impact of the macroeconomic environment on its ad business, which represents
nearly 80% of total revenue. However, we are also pleased with continuing strong growth in the
subscription and cloud businesses. With less uncertainty about the economy and an increasing focus on
cost efficiency, we expect ad revenue growth to return in the second half of this year, followed by
margin expansion in 2024. We expect further investments in artificial-intelligence-based products,
thereby limiting margin expansion over the next five years. In the meantime, we welcome the firm’s
continuing share repurchase as the stock still trades at a significant discount to our fair value estimate.
During the quarter Google’s search business, which is a better fit for direct response campaigns, held
up well while YouTube, which attracts more brand ads, was affected more, demonstrating the effect of
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the current environment on advertisers and how they prioritize their spending. We expect a more
balanced approach and more spending by advertisers as the macroeconomic environment improves. We
also expect monetization of YouTube short-form videos to contribute to the firm’s accelerating
advertising growth.
Regarding AI and the emergence of OpenAI’s ChatGPT, we commend Google management’s quick and
clear response, demonstrating that the firm has the AI technology prowess to launch AI-based features
not only in search, but also within its ad technology stack and cloud offerings, including Workspace, as
the emergence of AI competitors can disrupt search, overall digital advertising, and other areas.
Alphabet Q3 Misses Expectations As Macroeconomic Uncertainty Hits Ad Revenue; Shares

Undervalued Ali Mogharabi, Senior Equity Analyst, 26 Oct 2022
Alphabet reported disappointing third-quarter results as revenue growth decelerated further, driven by
the stronger dollar and economic uncertainty, which is increasing hesitancy in ad spending. Assuming
less uncertainty in the macroeconomic environment, plus the monetization of YouTube Shorts, we
expect advertising revenue growth to return to double-digit levels in 2023. Unlike advertising, the cloud
business maintained impressive growth. After adjusting our model, including lower top-line growth
assumptions, we slightly reduce our fair value estimate of Alphabet to $160 from $169. The stock is
down nearly 7% in afterhours trading and remains attractive.
Total revenue increased only 6% year over year, but 11% excluding the foreign currency headwind.
Advertising revenue rose 2.5% from last year, helped by 4.3% growth in search, which was partially
offset by disappointing declines in YouTube (1.9%) and network advertising (1.6%). Cloud segment
growth was robust (37.6%) as demand for migration to the cloud remains a high priority for firms looking
for cost savings.
YouTube Shorts has already reached 1.5 billion monthly active viewers, reducing fears that TikTok is
hurting the business. With the strong network effect present on YouTube, the strength of Google
search, and the firm’s ad-tech powered measuring capabilities, Google’s ad revenue miss wasn’t
significantly due to Apple privacy changes either. We think expectations of an economic downturn
among advertisers is the main culprit. Management mentioned that some advertisers are slowing down
their spending on Google’s properties, mainly YouTube. Alphabet also saw some pullback in search ad
spending, mainly by financial services companies that provide insurance, loans, mortgages, and
cryptocurrency services. We are assuming that lower ad spending is more widespread, implied by the
third-quarter weakness in Google’s network ad revenue, which we view as a demand indicator for ad
spending on non-Google properties. K
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Competitors Price vs. Fair Value
Amazon.com Inc AMZN
Fair Value: 137.00

3 Feb 2023 05:12, UTC
200
Last Close: 129.13
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.68 0.80 0.90 0.81 0.56 0.94 Price/Fair Value
28.43 23.03 76.26 2.38 -49.62 53.73 Total Return %
Morningstar Rating
Total Return % as of 25 Jul 2023. Last Close as of 25 Jul 2023. Fair Value as of 3 Feb 2023 05:12, UTC.
Apple Inc AAPL
Last Close: 193.62

200 Fair Value: 150.00
20 Jan 2023 17:37, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
0.79 1.33 1.56 1.43 1.00 1.29 Price/Fair Value
-5.12 88.09 81.85 34.48 -26.32 49.38 Total Return %
Morningstar Rating
Total Return % as of 25 Jul 2023. Last Close as of 25 Jul 2023. Fair Value as of 20 Jan 2023 17:37, UTC.
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Microsoft Corp MSFT
Last Close: 350.98

400 Fair Value: 325.00
26 Apr 2023 04:03, UTC
300 Over Valued

Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
0.78 1.02 0.95 0.97 0.75 1.08 Price/Fair Value
20.75 57.12 42.37 52.24 -27.94 46.92 Total Return %
Morningstar Rating
Total Return % as of 25 Jul 2023. Last Close as of 25 Jul 2023. Fair Value as of 26 Apr 2023 04:03, UTC.
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Morningstar Historical Summary

Financials as of 31 Mar 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Bil) 56 66 75 90 111 137 162 183 258 283 70 285
Revenue Growth % 20.6 18.9 13.6 20.4 22.8 23.4 18.3 12.8 41.2 9.8 2.6 5.3
EBITDA (USD Bil) 20 22 25 30 34 44 52 62 104 88 21 86
EBITDA Margin % 35.9 33.9 33.1 33.7 30.9 32.2 31.8 33.9 40.2 31.0 30.8 30.3
Operating Income (USD Bil) 15 16 19 24 29 33 36 41 79 75 17 72
Operating Margin % 27.7 25.0 25.8 26.3 26.1 23.8 22.2 22.6 30.6 26.5 25.0 25.4
Net Income (USD Bil) 13 14 16 19 13 31 34 40 76 60 15 59
Net Margin % 22.9 21.4 21.1 21.6 11.4 22.5 21.2 22.1 29.5 21.2 21.6 20.6
Diluted Shares Outstanding (Bil) 14 14 14 14 14 14 14 14 14 13 13 13
Diluted Earnings Per Share (USD) 0.94 1.03 1.14 1.39 0.90 2.19 2.46 2.93 5.61 4.56 1.17 4.50
Dividends Per Share (USD) — — — — — — — — — — — —
Valuation as of 30 Jun 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales — 5.3 7.3 6.3 7.0 5.6 6.0 7.0 8.2 4.2 5.5 5.5
Price/Earnings — 27.9 35.1 28.2 35.0 38.9 28.7 33.9 27.9 17.6 26.9 26.9
Price/Cash Flow — 16.9 20.2 16.5 20.3 16.1 17.6 21.3 22.0 12.7 17.5 17.5
Dividend Yield % — — — — — — — — — — — —
Price/Book — 3.6 4.5 4.0 4.6 4.2 4.7 5.6 7.8 4.5 5.9 5.9
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 31 Mar 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 12.4 11.8 11.4 12.4 6.9 14.3 13.5 13.5 22.4 16.6 4.1 16.1
ROE % 16.0 14.8 14.1 15.0 8.7 18.6 18.1 19.0 32.1 23.6 5.8 22.8
ROIC % 14.3 13.5 12.9 14.0 8.0 17.3 16.2 16.6 28.4 20.7 5.0 19.8
Asset Turnover 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.8 0.8 0.2 0.8
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 2.5 3.0 1.6 2.8 2.5 2.2 6.8 10.1 9.4 9.6 9.2 —
Equity/Assets % 78.7 80.4 81.6 83.0 77.3 76.3 73.0 69.6 70.0 70.1 70.6 —
Total Debt/EBITDA 0.3 0.2 0.2 0.1 0.1 0.1 0.3 0.4 0.3 0.3 1.4 —
EBITDA/Interest Expense 246.0 221.2 238.7 245.3 313.9 386.5 515.1 458.6 299.2 245.4 268.4 243.8
Morningstar Analyst Historical/Forecast Summary as of 25 Jul 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 12-31-2022 2021 2022 2023 2024 2025
Price/Sales 7.4 4.0 5.2 4.7 4.2
Revenue (USD Mil) 257,637 282,836 301,348 334,012 373,498 Price/Earnings 25.8 19.5 25.3 22.2 19.2
Revenue Growth % 41.2 9.8 6.6 10.8 11.8 Price/Cash Flow 28.6 19.1 20.8 17.4 15.3
EBITDA (USD Mil) 106,531 110,132 114,749 124,629 139,480 Dividend Yield % — — — — —
EBITDA Margin % 41.3 38.9 38.1 37.3 37.3 Price/Book 7.8 4.6 5.1 4.2 3.4
EV/EBITDA 16.9 9.6 12.8 11.8 10.5
Operating Income (USD Mil) 78,714 74,842 72,537 81,689 93,887
Operating Margin % 30.6 26.5 24.1 24.5 25.1
Net Income (USD Mil) 76,033 59,972 63,815 72,404 83,766
Net Margin % 29.5 21.2 21.2 21.7 22.4
Diluted Shares Outstanding () 13.55 13.16 13.15 13.12 13.10
Diluted Earnings Per Share(USD) 5.61 4.56 4.85 5.52 6.39
Dividends Per Share(USD) 0.00 0.00 0.00 0.00 0.00
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ESG Risk Rating Breakdown
Exposure Subject Subindustry (38.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 40.8 risks driven by their business model
40.8
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 37.8 Medium
2 0 55+ specified at the company level
Unmanageable Risk 3.0
Low Medium High u Scoring ranges from 0-55+ with categories of low, me-
dium, and high-risk exposure
Management
u Management measures a company’s ability to manage
Manageable Risk 37.8 ESG risks through its commitments and actions
43.1%
– Managed Risk3 16.3 Average
u Management assesses a company's efficiency on ESG
Management Gap4 21.5 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 24.5 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

24.50
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Jul 05, 2023. Highest Controversy Level is as of Jul 08,
2023. Sustainalytics Subindustry: Internet Software and Services.
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Sustainalytics provides Morningstar with company ESG ratings and metrics
risks, by evaluating the company’s ability to manage the ESG risks it faces. on a monthly basis and as such, the ratings in Morningstar may not
necessarily reflect current Sustainalytics’ scores for the company. For the
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by most up to date rating and more information, please visit: sustainalytics.com/
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 43.1% 4. Management Gap assesses risks that are not esg-ratings/.
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 05 Jul 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
Alphabet Inc 40.8 | Medium 0 55+ 43.1 | Average 100 0 24.5 | Medium 0 40+
Microsoft Corp 34.1 | Low 0 55+ 59.4 | Strong 100 0 15.3 | Low 0 40+
Amazon.com Inc 41.7 | Medium 0 55+ 29.0 | Average 100 0 30.5 | High 0 40+
Verizon Communications Inc 40.4 | Medium 0 55+ 61.2 | Strong 100 0 18.2 | Low 0 40+
Apple Inc 32.9 | Low 0 55+ 53.4 | Strong 100 0 16.4 | Low 0 40+
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Appendix
Historical Morningstar Rating
Alphabet Inc Class C GOOG 25 Jul 2023 21:20, UTC
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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Amazon.com Inc AMZN 25 Jul 2023 21:20, UTC
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Apple Inc AAPL 25 Jul 2023 21:20, UTC
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Microsoft Corp MSFT 25 Jul 2023 21:20, UTC
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Overview turns on invested capital (or ROIC) over and above our es- Stage I: Explicit Forecast
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
In this stage, which can last five to 10 years, analysts
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
make full financial statement forecasts, including items
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
such as revenue, profit margins, tax rates, changes in
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
workingcapital accounts, and capital spending. Based on
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
these projections, we calculate earnings before interest,
ally standardized, proprietary discounted cash flow, or after taxes (EBI) and the net new investment (NNI) to de-
DCF, modeling templates. We use scenario analysis, inde- Companies with a narrow moat are those we believe are
rive our annual free cash flow forecast.
pth competitive advantage analysis, and a variety of other more likely than not to achieve normalized excess returns
analytical tools to augment this process. Moreover, we for at least the next 10 years. Wide-moat companies are Stage II: Fade
think analyzing valuation through discounted cash flows those in which we have very high confidence that excess The second stage of our model is the period it will take
presents a better lens for viewing cyclical companies, returns will remain for 10 years, with excess returns more the company’s return on new invested capital—the re-
high-growth firms, businesses with finite lives (e.g., likely than not to remain for at least 20 years. The longer turn on capital of the next dollar invested (“RONIC”)—to
mines), or companies expected to generate negative a firm generates economic profits, the higher its intrinsic decline (or rise) to its cost of capital. During the Stage II
earnings over the next few years. That said, we don’t dis- value. We believe low-quality, no-moat companies will period, we use a formula to approximate cash flows in
miss multiples altogether but rather use them as support- see their normalized returns gravitate toward the firm’s lieu of explicitly modeling the income statement, balance
ing cross-checks for our DCF-based fair value estimates. cost of capital more quickly than companies with moats. sheet, and cash flow statement as we do in Stage I. The
We also acknowledge that DCF models offer their own length of the second stage depends on the strength of
challenges (including a potential proliferation of estim- When considering a company's moat, we also assess the company’s economic moat. We forecast this period to
ated inputs and the possibility that the method may miss whether there is a substantial threat of value destruction, last anywhere from one year (for companies with no eco-
shortterm market-price movements), but we believe these stemming from risks related to ESG, industry disruption, nomic moat) to 10–15 years or more (for wide-moat com-
negatives are mitigated by deep analysis and our financial health, or other idiosyncratic issues. In this con- panies). During this period, cash flows are forecast using
longterm approach. text, a risk is considered potentially value destructive if its four assumptions: an average growth rate for EBI over the
occurrence would eliminate a firm’s economic profit on a period, a normalized investment rate, average return on
Morningstar’s equity research group (”we,” “our”) be- cumulative or midcycle basis. If we deem the probability new invested capital (RONIC), and the number of years
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize until perpetuity, when excess returns cease. The invest-
future cash flows it can generate. The Morningstar Rating the company as possessing an economic moat. ment rate and return on new invested capital decline un-
for stocks identifies stocks trading at a discount or premi- til a perpetuity value is calculated. In the case of firms
um to their intrinsic worth—or fair value estimate, in To assess the sustainability of excess profits, analysts per- that do not earn their cost of capital, we assume marginal
Morningstar terminology. Five-star stocks sell for the form ongoing assessments of the moat trend. A firm’s ROICs rise to the firm’s cost of capital (usually attribut-
biggest risk adjusted discount to their fair values, where- moat trend is positive in cases where we think its sources able to less reinvestment), and we may truncate the
as 1-star stocks trade at premiums to their intrinsic worth. of competitive advantage are growing stronger; stable second stage.
where we don’t anticipate changes to competitive ad-
Four key components drive the Morningstar rating: (1) our vantages over the next several years; or negative when Stage III: Perpetuity
assessment of the firm’s economic moat, (2) our estimate we see signs of deterioration. Once a company’s marginal ROIC hits its cost of capital,
of the stock’s fair value, (3) our uncertainty around that we calculate a continuing value, using a standard per-
fair value estimate and (4) the current market price. This 2. Estimated Fair Value petuity formula. At perpetuity, we assume that any
process ultimately culminates in our singlepoint star rat- Combining our analysts’ financial forecasts with the growth or decline or investment in the business neither
ing. firm’s economic moat helps us assess how long returns creates nor destroys value and that any new investment
on invested capital are likely to exceed the firm’s cost of provides a return in line with estimated WACC.
1. Economic Moat capital. Returns of firms with a wide economic moat rat-
The concept of an economic moat plays a vital role not ing are assumed to fade to the perpetuity period over a Because a dollar earned today is worth more than a dollar
only in our qualitative assessment of a firm’s long-term longer period of time than the returns of narrow-moat earned tomorrow, we discount our projections of cash
investment potential, but also in the actual calculation of firms, and both will fade slower than no-moat firms, in- flows in stages I, II, and III to arrive at a total present
our fair value estimates. An economic moat is a structural creasing our estimate of their intrinsic value. value of expected future cash flows. Because we are
feature that allows a firm to sustain excess profits over a modeling free cash flow to the firm—representing cash
long period of time. We define economic profits as re- Our model is divided into three distinct stages: available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
Morningstar Equity Research Star Rating Methodology weighted average of the costs of equity, debt, and pre-
ferred stock (and any other funding sources), using ex-
pected future proportionate long-term, market-value
weights.
3. Uncertainty Around That Fair Value Estimate

Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company’s intrinsic
value. This rating is used to assign the margin of safety
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required before investing, which in turn explicitly drives Morningstar Equity Research Star Rating Methodology
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
thing that can affect our ability to accurately predict
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or The market prices used in this analysis and noted in the individuals must consider their own specific investment
selling the stock—widens as our uncertainty of the es- report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income
timated value of the equity increases. The more uncertain which we believe is a reliable source. needs, and complete investment portfolio, among other
we are about the potential dispersion of outcomes, the factors.
greater the discount we require relative to our estimate of For more details about our methodology, please go to
the value of the firm before we would recommend the https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be-
purchase of the shares. In addition, the Uncertainty Rat- low:
ing provides guidance in portfolio construction based on QQQQQ We believe appreciation beyond a fair risk ad-
Morningstar Star Rating for Stocks
risk tolerance. justed return is highly likely over a multiyear time frame.
Once we determine the fair value estimate of a stock, we
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very
daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme.
lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium
serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Other Definitions

Our star ratings are guideposts to a broad audience and
ß
Last Price: Price of the stock as of the close of the mar- which company’s economic value at risk is driven by en-
This report is for informational purposes only and has no
ket of the last trading day before date of the report. vironment, social and governance (ESG) factors.
regard to the specific investment objectives, financial
situation or particular needs of any specific recipient. This
Capital Allocation Rating: Our Capital Allocation (or Sustainalytics analyzes over 1,300 data points to assess a
publication is intended to provide information to assist in-
Stewardship) Rating represents our assessment of the company’s exposure to and management of ESG risks. In
stitutional investors in making their own investment de-
quality of management’s capital allocation, with particu- other words, ESG Risk Ratings measures a company’s un-
cisions, not to provide investment advice to any specific
lar emphasis on the firm’s balance sheet, investments, managed ESG Risks represented as a quantitative score.
investor. Therefore, investments discussed and recom-
and shareholder distributions. Analysts consider compan- Unmanaged Risk is measured on an open-ended scale
mendations made herein may not be suitable for all in-
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing
vestors: recipients must exercise their own independent
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman-
judgment as to the suitability of such investments and re-
Corporate governance factors are only considered if they aged ESG Risk score is below 50.
commendations in the light of their own investment ob-
are likely to materially impact shareholder value, though
jectives, experience, taxation status and financial posi-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are
tion.
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low,
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
The information, data, analyses and opinions presented
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar-
herein are not warranted to be accurate, correct, com-
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus-
plete or timely. Unless otherwise provided in a separate
Standard rating is most common as most managers will tries covered.
agreement, neither Morningstar, Inc. or the Equity Re-
exhibit neither exceptionally strong nor poor capital alloc-
search Group represents that the report contents meet all
ation. The ESG Risk Rating Assessment is a visual representa-
of the presentation and/or disclosure standards applic-
tion of Sustainalytics ESG Risk Categories on a 1 to 5
able in the jurisdiction the recipient is located.
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
Except as otherwise required by law or provided for in a
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit
separate agreement, the analyst, Morningstar, Inc. and
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/
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and employees shall not be responsible or liable for any
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating
trading decisions, damages or other losses resulting from,
a company or security. Ratings involve unknown risks and
or related to, the information, data, analyses or opinions
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to
within the report. The Equity Research Group encourages
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected
recipients recipients of this report to read all relevant is-
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sue documents (e.g., prospectus) pertaining to the secur-
lar emphasis on the firm’s balance sheet, investments, buy or sell a security.
ity concerned, including without limitation, information
and shareholder distributions. Analysts consider compan-
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fore making an in vestment decision and when deemed
management, and dividend and share buyback policies. Please note that investments in securities are subject to
necessary, to seek the advice of a legal, tax, and/or ac-
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar-
counting professional.
are likely to materially impact shareholder value, though antee that the intended investment objectives will be
either the balance sheet, investment, or shareholder dis- achieved. Past performance of a security may or may not
The Report and its contents are not directed to, or inten-
tributions. Analysts assign one of three ratings: "Exem- be sustained in future and is no indication of future per-
ded for distribution to or use by, any person or entity who
plary", "Standard", or "Poor". Analysts judge Capital Alloc- formance. A security investment return and an investor’s
is a citizen or resident of or located in any locality, state,
ation from an equity holder’s perspective. Ratings are de- principal value will fluctuate so that, when redeemed, an
country or other jurisdiction where such distribution, pub-
termined on a forward looking and absolute basis. The investor’s shares may be worth more or less than their
lication, availability or use would be contrary to law or
Standard rating is most common as most managers will original cost. A security’s current investment performance
regulation or which would subject Morningstar, Inc. or its
exhibit neither exceptionally strong nor poor capital alloc- may be lower or higher than the investment performance
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ation. noted within the report. Morningstar’s Uncertainty Rating
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serves as a useful data point with respect to sensitivity
Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair
or to Dec. 9, 2020, was determined using a different pro- Where this report is made available in a language other
value price.
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
dividend and share buyback policies, analysts also con- the English and translated versions of the report, the Eng-
sidered execution, compensation, related party transac- lish version will control and supersede any ambiguities
General Disclosure associated with any part or section of a report that has
tions, and accounting practices in the rating.
Unless otherwise provided in a separate agreement, re- been issued in a foreign language. Neither the analyst,
cipients accessing this report may only use it in the coun- Morningstar, Inc., or the Equity Research Group guaran-
Sustainalytics ESG Risk Rating Assessment:The ESG
try in which the Morningstar distributor is based. Unless tees the accuracy of the translations.
Risk Rating Assessment is provided by Sustainalytics; a
stated otherwise, the original distributor of the report is
Morningstar company.
Morningstar Research Services LLC, a U.S.A. domiciled This report may be distributed in certain localities, coun-
financial institution. tries and/or jurisdictions (“Territories”) by independent
Sustainalytics’ ESG Risk Ratings measure the degree to
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Morningstar Equity Analyst Report | Report as of 26 Jul 2023 02:37, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 23

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Price vs. Fair Value

Fair Value: 161.00

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Bulls Say Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Fair Value Fair Value Last Close

Economic Moat Wide Wide Wide Wide

remain one of the main beneficiaries.

generating top-line growth as search traffic shifts from desktop to mobile.

Bears Say Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

the state of the search ad space.

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Economic Moat Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

the default option on their mobile devices.

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Capital Allocation Ali Mogharabi, Senior Equity Analyst, 24 Jul 2023

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Analyst Notes Archive

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Alphabet Q3 Misses Expectations As Macroeconomic Uncertainty Hits Ad Revenue; Shares

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Competitors Price vs. Fair Value

Amazon.com Inc AMZN

Fair Value: 137.00

Apple Inc AAPL

Last Close: 193.62

150 Over Valued

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Microsoft Corp MSFT

Last Close: 350.98

300 Over Valued

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

Morningstar Historical Summary

Valuation as of 30 Jun 2023

Morningstar Analyst Historical/Forecast Summary as of 25 Jul 2023

Alphabet Inc Class C GOOG QQQQ 25 Jul 2023 21:20, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (38.0) u Exposure represents a company’s vulnerability to ESG

dium, and high-risk exposure

Management Gap4 21.5 100 0 programs, practices, and policies

Overall Unmanaged Risk 24.5 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

Amazon.com Inc AMZN 25 Jul 2023 21:20, UTC

Apple Inc AAPL 25 Jul 2023 21:20, UTC

Microsoft Corp MSFT 25 Jul 2023 21:20, UTC

Research Methodology for Valuing Companies

3. Uncertainty Around That Fair Value Estimate

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Our recommended margin of safety—the discount to fair

4. Market Price Other Definitions

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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