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SUMMARY
Parkev Tatevosian, CFA, provides a comprehensive assessment of Alphabet's recent capital expenditure increases and their implications for the company's valuation. He concludes that despite near-term pressure on free cash flow, Alphabet stock is now fully undervalued and represents a buying opportunity.
MAIN POINTS
- Alphabet announces a $15 billion increase to its 2026 capital expenditure budget, raising the midpoint to $200 billion.
- Management signals that capital expenditures will rise significantly again in 2027, potentially reaching $250–300 billion.
- Tatevosian revises his free cash flow estimates for Alphabet downward, projecting negative figures for 2026 and 2027.
- Long-term forecasts remain positive, with expectations of substantial cash flows starting in 2029 from multiple business segments.
- After a 7% share price drop, Alphabet is now considered fully undervalued at $318 per share, prompting a high-conviction buy rating.
- Tatevosian affirms his intention to hold Alphabet shares, citing strong conviction in the stock's long-term value.
DETAILED ANALYSIS
Alphabet has updated its 2026 capital expenditure (CapEx) budget, increasing it by $15 billion to a midpoint of $200 billion, reflecting an accelerated delivery of capacity to meet robust demand, particularly in cloud services. This increase is viewed positively in terms of operational growth, as it suggests Alphabet is supply constrained and expects to generate higher revenue sooner. However, management's guidance that CapEx will rise significantly again in 2027, potentially by at least 25%, implies a budget in the range of $250 to $300 billion.
This escalation benefits suppliers such as Nvidia, Micron, SK Hynix, Broadcom, and Taiwan Semiconductor Manufacturing Company, but raises concerns for Alphabet shareholders about near-term profitability.
The company also plans to continue hiring in key areas like AI and cloud, as well as increasing marketing investments to support AI products. As a result, free cash flow is expected to remain under pressure. Tatevosian has revised his free cash flow projections for Alphabet, moving from positive estimates to negative $5 billion for 2026 and negative $2–10 billion for 2027.
Despite these downward revisions, the impact on Alphabet’s overall valuation is limited because the bulk of its value is derived from anticipated strong cash flows starting in 2029 and beyond. By 2029, Tatevosian projects Alphabet could generate $150 billion in cash flow, rising to $286 billion by 2035, driven by growth in Google Cloud, advertising, and Waymo.
Short-term challenges, such as a modest 2% sequential increase in revenue growth and a 7% drop in share price following quarterly results, have made Alphabet stock fully undervalued according to Tatevosian’s fair value estimate of $375 per share versus the current price of $318. He now rates Alphabet as a buy with high conviction, emphasizing his intention to continue holding the stock due to its long-term prospects.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor via Parkev Tatevosian.
- Parkev Tatevosian's book on stock investing frameworks.
- Discounted access to Fiscal.ai for investment research.
- Webull sign-up link for bonus shares.
- Subscription link for Parkev Tatevosian's free monthly Substack newsletter.