Investing.com -- After Alphabet Inc. (NASDAQ: GOOGL) recently reported its quarterly earnings, analysts at Bernstein are asking a crucial question: could the tech giant’s biggest challenges ultimately turn into its greatest opportunities?
In a note following the earnings release, Bernstein analysts, led by Mark Shmulik, maintained a market-perform rating on Alphabet, lowering the price target to $165 per share from $200.
This new target implies a modest upside of about 9%, but Bernstein suggests the company’s current moment is about more than just earnings, it could represent a turning point in Alphabet’s (NASDAQ:GOOGL) trajectory.
Alphabet is navigating a complex landscape, with challenges including rising tariffs, recession risks, regulatory scrutiny, and the disruptive impact of artificial intelligence on its core search business.
Bernstein argues that these challenges could serve as a catalyst for long-overdue changes, such as improved operational discipline and a clearer product strategy.
For fiscal year 2024, Alphabet reported revenue of $350 billion. Bernstein projects that revenue will grow to $382 billion in 2025 and $423 billion by 2026, reflecting a compound annual growth rate of 10%.
EBITDA are expected to increase from $127.7 billion in 2024 to $158.4 billion by 2026, with margins remaining in the high 30s. Adjusted earnings per share are projected to rise from $9.82 in 2024 to $12.10 in 2026.
However, Bernstein revised its 2025 revenue estimate downward by 2% and cut its earnings forecast by 3%, citing weakness in advertising, particularly at YouTube and within its broader ad network. These areas, more exposed to brand advertising and macroeconomic downturns, are facing headwinds.
Currently, Alphabet trades at 17.2 times estimated 2025 earnings, or 14 times on an adjusted basis, a discount to both its historical average and the broader S&P 500.
Bernstein’s valuation combines a 13-times enterprise value-to-EBIT multiple and a discounted cash flow model, yielding a per-share value range of $102 to $181, depending on various scenarios, from regulatory breakdowns to business-as-usual.
The brokerage also flags key risks, including a bloated workforce, a fragmented AI strategy, and mounting legal challenges in the U.S. and Europe.
Ongoing antitrust cases involving Alphabet’s ad tech business and the Google Play Store are drawing comparisons to Microsoft’s legal battles in the early 2000s.
Google’s AI initiatives, such as Gemini, NotebookLM, and the now-defunct Pixie, have lacked a unified direction, while competitors like OpenAI have made significant strides with more focused offerings, like ChatGPT.
Despite these risks, Bernstein sees potential upside. If macroeconomic conditions deteriorate and industry layoffs accelerate, Alphabet may be forced to implement long-deferred cost-cutting measures.
A renewed focus on efficiency and better integration of AI across Google’s top apps could boost productivity by 20%.
In a scenario where regulatory rulings lead to divestitures or limits on paid distribution, Google could reallocate resources toward its core platforms and shift from a search-first model to an AI-first approach.
One idea floated by Bernstein was that Alphabet could use its $36 billion annual traffic acquisition cost to distribute Pixel phones for free, creating deeper integration and loyalty during a downturn.
Alphabet’s exposure to China-related ad revenue is relatively limited at just 5%, compared to 6% at Meta Platforms Inc (NASDAQ:META). Still, the company is not immune to global shocks.
A recession or escalation in tariffs could reduce search advertising growth by as much as 3 percentage points.
While Google Search is considered a more resilient ad product, it still depends on commercial queries, and weaker consumer intent during a downturn could lead to reduced search volume and lower ad revenue.
On a brighter note, Google Cloud continues to perform well, benefiting from price increases in Workspace and incremental gains in enterprise IT spending.
New CFO Anat Ashkenazi has emphasized a commitment to cost control, with layoffs underway in sales and marketing.
Bernstein places Alphabet in what it calls the "too hard" category, where uncertainty around regulation, macroeconomic pressures, and AI competition makes it difficult to take a definitive position.
Still, the revised price target of $165 reflects a split between a downside floor of $140 per share and an upside of $180, based on a 2026 price-to-earnings multiple of 17.