These measures can help Google strengthen investor confidence and increase valuation multiples. $Alphabet-C (GOOG.US)$ Amidst the increase in antitrust cases and the risk of fragmentation, and with valuation multiples at their lowest point, how should Google seize this opportunity of change to regain investor trust?

On September 18th, Morgan Stanley strategy analyst Brian Nowak and his team released a report listing four things that Google's new CFO can do to increase valuation multiples: increase disclosure of generative AI; provide guidance on revenue, operating expenses, and capital expenditures; disclose more comprehensive business sectors for YouTube and GCP; emphasize Google's positive impact on society.

Morgan Stanley points out that Google's years of antitrust lawsuits may undermine its position in online channels. In addition, Google faces many pressures, such as the interruption risk of generative AI search, increased capital expenditures, the high uncertainty of generative AI marginal return on investment (ROIC), and how to protect profits through operating expense management... At the same time, the market expects Google not to revise guidance on revenue and other aspects, leading to a lack of investor interest in Google's positive aspects.

Currently, Google's valuation multiple relative to the S&P 500 is approximately 0.87 times, the lowest in a decade, while the long-term average level is 1.1 times.

01 Help investors better understand the incremental opportunities brought by generative AI

First, Morgan Stanley believes that Google should consider providing more disclosures about incremental user engagement, revenue opportunities, and early signals of generative AI.

Disclosures will help investors better understand the sustainability of Google's capital expenditure growth and revenue growth. Although Google has shared comments on enhancing advertising effectiveness, the market needs a more in-depth understanding of Google's new technology and product adoption in order to quantify the potential impact of these returns on the profit and loss statement (P&L).

Secondly, Morgan Stanley believes that Google should maintain a high level of innovation and demonstrate new sources of innovation in its product portfolio.

The table below shows the products where Google may drive return on invested capital (ROIC) in areas such as search, YouTube, and cloud computing, and also shows new products and tools that Google is developing, entering the testing phase, and gradually rolling out. Due to ongoing antitrust regulation, Morgan Stanley believes that Google's ability to develop innovation, expand new users and advertisers is crucial to maintaining its leadership position in the online channel.

02 Provide and revise guidance to enhance investor confidence in free cash flow

First, Morgan Stanley believes that Google should provide specific guidance on AI capital expenditures and free cash flow.

Accompanied by the controversy over the AI bubble, the market is closely watching the capital expenditure growth of major technology companies in the next two years for generative AI. META provides future capital expenditure guidance, Microsoft provides capital expenditure comments for the following quarters, and Amazon provides comments on capital expenditure for the entire year. In comparison, Google's capital expenditure comments are too vague: 'Looking ahead, we expect capital expenditure for each quarter this year to be roughly flat or higher than the first quarter's $12 billion.'

This vagueness, combined with Google executives' previous statement that 'the risk of underinvestment is far greater than the risk of overinvestment,' has led to investors feeling a strong sense of uncertainty about Google's free cash flow (FCF). Morgan Stanley expects Google's 2025 capital expenditure to be approximately $57 billion, which means an approximate free cash flow of $8.20 per share. Based on this free cash flow estimate, Google's pe is about 19.5 times in 2025, with a relatively low valuation, especially considering the company's expected free cash flow growth rate of about 21% from 2023 to 2026.

However, a 10% increase in capital expenditure will result in a approximately 6% decrease in free cash flow per share. Therefore, more detailed capital expenditure guidance would help investors better understand the range of Google's free cash flow.

Secondly, Morgan Stanley believes that Google should quantify the further optimization benefits of operating expenses (Opex) and commit to expanding profit margins.

Over the past 20 months, Google has successfully implemented multiple workflows, redesigned its operating expense structure, and leveraged investment. These changes have made progress, with Google's operating expenses growing approximately 6% in 2023 and profit margins increasing by approximately 230 basis points. Compared to internet peers, Google is at an intermediate level in terms of operating expenses per employee, and near the upper limit in terms of revenue per employee.

The question is how Google's management will balance the increase in generative AI investment while improving efficiency, protecting earnings per share (EPS), and free cash flow. Morgan Stanley believes that Google still has room for further efficiency improvement. Although Google achieved leverage in 2023, in the previous 6 years, despite revenue growing about three times, Google's profit margin only expanded by about 10 basis points in total. Therefore, providing clearer quantitative guidance on operating expenses, profit margins, etc., can help investors understand Google's future plans to optimize operating expenses.

Finally, Morgan Stanley believes that Google should issue quarterly guidance and strive to raise expectations.

Finally, Morgan Stanley believes that Google should issue quarterly guidance and strive to raise expectations.

Many of Google's peers, such as META, Apple, Microsoft, etc., have released quarterly guidance to help investors better understand the latest market trends and grasp the reasonable range of the company's future growth and profitability. Some companies even provide annual guidance.

By releasing guidance and continuously revising it, it will enhance investors' confidence in the company's business operations and contribute to the growth of valuation multiples while reducing fluctuations in valuation multiples.

03 Improve the disclosure of YouTube and GCP businesses to help investors understand key growth areas.

First, Morgan Stanley believes that Google should break down the advertising and subscription revenue of YouTube.

Existing disclosures about YouTube indicate that it generated approximately $31.5 billion in annual advertising revenue in 2023 and is expected to grow by 12.5% in 2024. However, the subscription status of YouTube is not clear. Google has been internally driving the growth of YouTube's subscription business, and due to limited disclosure, investors can only estimate that YouTube's annual subscription revenue in 2023 is approximately $15 billion.

However, Morgan Stanley believes that the current disclosures of YouTube underestimate its subscription business scale by about 50% and overlook its higher valuation multiples and more sustainable and stable business characteristics. Therefore, Morgan Stanley suggests that Google provide continuous profit disclosure for this business to help the market better evaluate this business compared to other leading online video platforms such as Netflix.

Secondly, Morgan Stanley believes that Google should also break down Workspace and GCP businesses in its Google Cloud business.

Existing disclosures about Google Cloud business indicate that it generated approximately $33 billion in annual advertising revenue in 2023 and is expected to grow by 31% in 2024. However, this business segment includes both Workspace business and the faster-growing and critically important hyperscale cloud computing business (GCP). Although there are market estimates about GCP and Workspace, during this critical period of Generative AI, continuous disclosure will help the market better understand Google's development compared to AWS and Azure.

Morgan Stanley believes that in this field, the execution and disclosure level is one of the biggest opportunities for Google's valuation multiple expansion, and it is also an opportunity for investors to better understand the return on capital expenditure.

04 emphasizes Google's positive impact on society and regaining control over public narratives.

Morgan Stanley believes that Google should actively promote its positive impact on society and regain control over public narratives in various ways.

As mentioned earlier, Google may face years of antitrust regulation in the future. Although the disclosure of information during legal proceedings may be complex, Morgan Stanley believes that Google at least has the opportunity to express its position more actively through the release of briefings, blog comments, etc., and to demonstrate its positive impact on society, users, advertisers, developers, small and medium-sized enterprises, and large enterprises.

Specifically, Google can learn from Amazon's practice and better promote its positive impact on the entire economic system. Amazon frequently releases press releases detailing the number of jobs it has created, its investments in local communities, and the revenue it generates for third-party sellers.

For Google, millions of small and medium-sized enterprises use Google's platform to build their businesses. The Android ecosystem and app store enable device manufacturers and developers to create billion-dollar enterprises. Over 1 billion people worldwide use free Google Maps, and Google Translate improves global communication and is even used by doctors to save lives... There are many more examples like this. Google's products provide great public welfare and utility to society, but its current valuation multiple does not reflect these values.

Editor/Somer