Alphabet (GOOGL) : June 2025

Company Overview

Alphabet Inc. is the parent company of Google and a conglomerate of diverse technology businesses. Its core Google segment spans multiple products and services that dominate their categories:

• Search & Advertising: Google Search is the world’s leading search engine, handling around 90% of global search queries. In 2024, Google Search (and related search advertising) generated about $198 billion in revenue – 56.6% of Alphabet’s total. Google’s advertising machine (search ads, YouTube ads, and third-party ad networks) contributed roughly 75% of overall revenue, reflecting its unparalleled reach in online ads.

• YouTube: Acquired by Google in 2006, YouTube is the premier online video platform with over 2 billion logged-in monthly users. It has become a major advertising outlet and content ecosystem. YouTube ad revenue was $36.1 billion in 2024 (10% of Alphabet’s revenue), and continues to grow via new formats (shorts, streaming TV, podcasts) and subscriptions (YouTube Premium, YouTube TV).

• Google Cloud: Alphabet’s cloud computing division provides infrastructure (IaaS), platform services (PaaS), and software (SaaS) like Google Workspace. Google Cloud is the third-largest cloud provider globally, with 2024 revenue of $43.2 billion (12.4% of total). It has been expanding rapidly (28–30% YoY growth) and reached profitability in 2024, signalling that heavy investments in data centres and AI infrastructure are paying off.

• Android & Google Play: Google’s Android mobile operating system powers about 71% of the world’s smartphones (over 3 billion active devices), providing a massive base for Google’s services. While Android itself is open-source, Google monetises it through the Google Play app store, mobile search and Chrome defaults, and licensing. Android’s ecosystem helps funnel billions of users into Google’s search, YouTube, Maps, and other apps, reinforcing its market dominance.

• Hardware and Other Services: Google has a growing hardware portfolio (Pixel smartphones, Pixel Watch, Nest smart home devices, Chromecast, etc.) and other services like the Google Play app store, YouTube subscriptions, and digital media (apps, music, etc.). These are reported within “Google other” revenues ($40.3 billion in 2024), accounting for 11.5% of sales. While hardware and subscriptions are not as large as ads, they enhance the Google ecosystem and diversify revenue.

• Other Bets: Alphabet’s “Other Bets” are high-potential, long-term projects outside the core Google umbrella. This includes Waymo (self-driving vehicles), Verily (life sciences), Wing (drone delivery), Google Fibre (broadband), and others, often developed under Alphabet’s X lab. These ventures are currently small in scale – only $1.6 billion revenue in 2024 (≈0.5% of total) – and operate at large losses (over $4 billion operating loss in 2024). Waymo, for instance, remains a leader in autonomous driving technology but has yet to achieve commercial profitability. While Other Bets offer potential upside (e.g. Waymo’s valuation could be significant in the long run), they reflect Alphabet’s willingness to invest in moonshots that may not pay off for many years, if ever.

Alphabet’s corporate structure allows Google’s core businesses to fund these emerging ventures. The Google segment (search, ads, cloud, etc.) provides the cash flow and profits, while Other Bets are given operational autonomy and separate capital allocation. This structure aims to foster innovation without compromising Google’s financial performance.

Positives of Investing in Alphabet

• Dominance in Search & Digital Advertising: Alphabet’s Google has an effective monopoly in search (roughly 88–90% global market share) and is the backbone of the internet’s information retrieval. This translates directly into advertising heft – Google’s search advertising and related ads brought in roughly $199 billion in 2024. Advertisers are drawn to Google for its unmatched reach and data-driven targeting. Even as Google’s search share dipped slightly below 90% for the first time in a decade (due to minor gains by competitors), search revenues still grew 13% in 2024, underscoring the resilience of its franchise. The scale and profitability of Google’s ad business, which comprised 74% of Alphabet’s Q1 2025 revenues, is a key strength for investors, providing a cash cow to fund new innovations and shareholder returns.

• YouTube’s Growth and Monetisation: YouTube has evolved into the world’s largest video platform, capturing user engagement across traditional videos, live streaming, short-form content (YouTube Shorts), and even TV (YouTube TV). Its ad revenues reached $36 billion in 2024 and continue climbing as more advertisers shift budgets to digital video. YouTube’s dominance in online video (over 50% of total streaming watch time by some estimates) gives it pricing power with advertisers and opportunities for higher monetisation (e.g. new ad formats, commerce integrations). Additionally, YouTube’s 270+ million paid subscribers (for services like ad-free Premium, Music, and TV) provide a recurring revenue stream. The platform’s growth in creator content and user time spent positions Alphabet to keep benefiting from the secular rise of video advertising and streaming consumption.

• Google Cloud’s Expansion and Diversification: Google Cloud is emerging as a strong growth driver for Alphabet. In 2024, Cloud revenue rose 30% to $43 billion, and in Q1 2025 it jumped 28% YoY to $12.3 billion. Importantly, Google Cloud achieved profitability recently – Q1 2025 operating income for Cloud was $2.2 billion, up from $0.9 billion a year prior. This marks a turning point where heavy infrastructure investments are beginning to yield returns. As the world’s third-largest cloud provider, Google Cloud is leveraging its strengths in AI/ML (e.g. TensorFlow, Vertex AI), data analytics (BigQuery), and security to win enterprise customers. Its growing backlog and customer wins (including multi-cloud approaches) indicate potential for continued double-digit growth. For investors, Cloud’s rise diversifies Alphabet’s revenue beyond advertising and improves long-term margins (cloud services can be high-margin once scale is achieved).

• Leadership in AI and Innovation: Alphabet is at the forefront of artificial intelligence research and deployment. Google’s AI research arms (Google Brain and DeepMind, now combined into Google DeepMind) have pioneered breakthroughs like the Transformer architecture, AlphaGo, and protein-folding AI (AlphaFold). The company’s “AI-first” strategy means AI is infused across products – from AI-powered Search overviews and smart Google Assistant features to AI cloud offerings (e.g. generative AI tools in GCP). In 2023–2024, Alphabet aggressively ramped up AI development, launching its own large language models (PaLM, LaMDA) and the next-generation Gemini model to compete with OpenAI’s GPT. Google has also integrated generative AI into Google Workspace and Search (through the Search Generative Experience), showing its ability to quickly productise AI advances. The company’s R&D spending is massive – over $150 billion in the past 5 years (2019–2024) – much of it aimed at AI capabilities and infrastructure. This scale of investment, along with Alphabet’s talent pool of AI researchers, positions it as a leader in the AI revolution. For investors, Alphabet’s AI prowess provides a competitive moat and potential new revenue streams (e.g. AI cloud services, improved ad targeting, autonomous driving algorithms for Waymo).

• Robust Financials and Shareholder Returns: Alphabet’s financial position is exceptionally strong. It generated $100 billion in net income in 2024 and over $60 billion in free cash flow (after heavy capex). The company sits on a large cash hoard (tens of billions in net cash) and has minimal debt, giving it flexibility for strategic acquisitions, buybacks, and investments. In recent years, Alphabet has begun returning more capital to shareholders. It initiated a dividend in 2023 and raised it 5% to $0.21 per share in 2025. More significantly, it authorises sizable share repurchases – in April 2025, the Board approved an additional $70 billion stock buyback program. These buybacks shrink the share count and signal management’s confidence in the company’s value. Alphabet’s stock has rewarded shareholders: despite some volatility, it delivered a 206% total return over the past five years (as of March 2025). The combination of strong earnings growth, a fortress balance sheet, and shareholder-friendly capital allocation makes Alphabet an attractive long-term investment for many.

Risks and Challenges

• Regulatory Scrutiny and Antitrust Pressure: Alphabet faces intense scrutiny from regulators globally due to its dominant market positions. In the U.S., the Department of Justice and state attorneys general have pursued a major antitrust case against Google Search. A federal trial in 2024–2025 alleges Google maintained an illegal monopoly in search (e.g. via multibillion-dollar payments to be the default search engine on browsers and devices). Potential remedies being considered include forcing Google to stop paying Apple and others for default status and to share search data with competitors. A ruling is expected by late 2025, and adverse outcomes could materially impact Google’s business model – for instance, losing default search placement on iPhones or having to open up its data troves. In the EU, Google has already been fined over €8 billion (≈$9B) in the past decade for antitrust violations, and new regulations like the Digital Markets Act (DMA) could impose further constraints (such as limits on self-preferencing Google services in search results or restrictions in Android’s app store policies). Regulatory and legal challenges create uncertainty and could lead to fines, business model changes, or even the breakup of parts of Alphabet. Ongoing privacy regulations (GDPR in Europe, data localisation laws in other countries) also pose compliance costs and limitations on Google’s data-driven advertising model.

• Competition and Technological Disruption: While Google is the market leader in many areas, it faces formidable competition that could erode its dominance. In search, Microsoft has aggressively integrated OpenAI’s GPT-4 into Bing, offering AI chat-based search that challenges the traditional Google interface. OpenAI’s ChatGPT and other AI chatbots present an alternate way to find information that could reduce the frequency of Google searches (users might get answers directly from AI without clicking search results). If AI-driven alternatives gain traction, especially if they start carrying ads, they could cut into Google’s core search advertising revenue. The rise of AI has also lowered barriers for new entrants in information and content discovery, posing a longer-term threat (“maybe people don’t want 10 blue links anymore,” as the antitrust judge mused). Beyond search, Amazon is competing for digital ad budgets (via its e-commerce search ads) and leads Google in smart speakers/voice assistants. Meta (Instagram) and TikTok compete in the attention economy, potentially diverting ad spend and user time (especially among younger cohorts) away from Google’s platforms. In cloud computing, Google Cloud trails Amazon AWS and Microsoft Azure, which enjoy larger market share and partner ecosystems. Maintaining growth in the cloud will require aggressive pricing, innovation, and sales execution in the face of these deep-pocketed rivals. In sum, Alphabet must continuously innovate and cannot take its market leadership for granted in the fast-changing tech landscape.

• Dependence on Advertising & Cyclical Risks: Alphabet still derives roughly 3/4 of its revenue from advertising. This concentration exposes it to macroeconomic and secular risks affecting the ad industry. During economic downturns or cuts in corporate marketing budgets, Google’s ad revenues can suffer as advertisers pull back spend. We saw this in 2020 and again in late 2022, when slowing economic growth led to significantly decelerating Google ad revenue growth. Furthermore, changes in ad technology or user behaviour can pose risks – for example, increased use of ad-blockers, tighter privacy settings (limiting targeting data), or shifts of ad dollars to new formats (like advertisers preferring social media, influencer marketing, or other channels). Apple’s iOS privacy changes already had some impact on digital advertising targeting (though Google, with its search intent-based ads, was less hurt than social-media rivals). Still, Google’s heavy reliance on ad sales means any structural decline in digital ad spending or major shift in how companies reach consumers (for instance, a move toward more privacy-preserving ad models that Google hasn’t mastered) could weigh on Alphabet’s growth. The company has been trying to diversify – e.g., growing Cloud and YouTube subscriptions – but ads remain the profit engine. Investors should be aware that Alphabet’s fortunes are tied to the health of the global advertising market, which can be volatile.

• AI Disruption (Innovator’s Dilemma): While Google is a leader in AI, the technology poses a double-edged sword. The very AI innovations that Google is developing could disrupt its own search business model. For example, Google’s traditional search results (with links and ads) might be partly supplanted by AI-generated answers (which yield fewer clickable ads). Google has to carefully integrate generative AI into search in a way that preserves monetisation. If Google moves too slowly on AI, it risks losing users to AI-rich competitors; if it moves too quickly, it could cannibalise its ad revenue or incur much higher costs (AI queries are computationally expensive). Additionally, competitors’ AI breakthroughs could leapfrog Google – OpenAI, Microsoft, and others are racing ahead, and much of today’s AI research is open-source, meaning Google’s advantages are not unassailable. The cost of AI is another factor: training advanced models and running AI-powered services requires huge computing power. Google’s plan to invest $75 billion in capex in 2025 (mostly for servers and data centres to support AI and cloud growth) underscores the scale of this commitment. If returns on these AI investments don’t materialise (for instance, if AI doesn’t generate revenue commensurate with its cost), Alphabet’s profitability could be squeezed. Essentially, Google is walking a tightrope to reinvent itself with AI without undermining the core economics of its business – a significant execution risk.

• High Spending and Need for Discipline: Alphabet has been criticised at times for spending freely, whether on experimental projects, lavish employee benefits, or rapid headcount growth. In 2023, faced with investor pressure, the company undertook cost-cutting, including laying off 12,000 employees and reducing office space, signalling a new focus on efficiency. Still, expenses remain high: R&D was nearly $50 billion in 2024, and capital expenditures jumped to $52.5 billion in 2024 (from $32 billion in 2023), with an even larger outlay guided for 2025. These investments (in AI, cloud infrastructure, etc.) are necessary to maintain a technological edge, but they weigh on free cash flow in the near term. There’s a risk that some investments may not pay off – for example, Other Bets continue to lose over $4 billion a year with little to show in profits. If projects like Waymo or others never achieve scalability, Alphabet may be forced to write down those bets. Additionally, generous stock-based compensation (a common tech industry practice) dilutes existing shareholders if not offset by buybacks. For investors, the key question is whether management can balance innovation with financial discipline. Any signs of uncontrolled costs or sinking returns on investment (ROI) could dampen Alphabet’s earnings growth and valuation. On the flip side, maintaining discipline, as current CFO measures suggest, should allow Alphabet to continue funding growth while expanding margins. This dynamic will be important to watch, especially as the company enters an investment-heavy cycle in AI and cloud.

  
  

Financial Performance

• Alphabet’s recent financial performance has been strong, rebounding from a slower 2022. Fiscal year 2024 saw significant acceleration: revenue hit $350.0 billion, a 14% increase from $307.4 billion in 2023. Importantly, profitability surged – operating income was $112.4 billion (up 33% YoY) with an operating margin of 32% (versus 27% in 2023). Net income accordingly jumped to $100.1 billion for 2024, reflecting margin expansion driven by cost controls and efficiency gains (including the benefit of layoffs and slower headcount growth) as well as strong revenue growth. Alphabet’s free cash flow remained robust despite higher capital expenditures – the company continues to generate tens of billions in excess cash annually.

• Examining revenue mix in 2024, Google’s core advertising businesses resumed healthy growth after a brief pandemic-era slowdown. Search advertising revenue rose 13% to $198 billion, while YouTube ad revenue grew about 7%, topping $36 billion. YouTube’s growth was notable because it had seen flat/slight declines in late 2022; the return to growth indicates improved advertiser demand and successful new ad products. Google’s Network ads (AdSense, etc.) were slightly down to $30.4 B, a trend to monitor as it may reflect shifts in how advertisers value third-party display ads. Outside of advertising, Google’s other revenues (Play Store, hardware, subscriptions) climbed to $40.3 B (up 10% YoY), aided by hardware launches and services like Google One cloud storage subscriptions and the NFL Sunday Ticket on YouTube. Google Cloud was a standout performer – growing 37% in 2024 (in constant currency) to $43.1 B and turning its first full-year operating profit. These figures illustrate that Alphabet is successfully broadening its revenue base beyond ads, though ads remain the lion’s share.

• The momentum has carried into 2025. In the first quarter of 2025, Alphabet’s revenue was $90.2 billion, up 12% year-on-year. This beat market expectations and marked an acceleration from 9% growth in the prior year’s Q1. Growth was broad-based: Google Search & Other revenue rose to $50.7 B (+10% YoY), YouTube ads to $8.93 B (+10% YoY), and Google Cloud to $12.3 B (+28% YoY). Impressively, Google Cloud’s operating profit in Q1 was $2.18 B, nearly triple the $0.9 B a year earlier, showing improving scalability. Alphabet’s Q1 operating margin expanded to 34% (from 32% in Q1 2024), and net income leapt 46% to $34.5 B – aided partly by a one-time gain on equity investments, but also by the strong core business. These results demonstrate the company’s ability to deliver growth even at its enormous scale, highlighting continuous demand for its services.

• Alphabet’s balance sheet remains a fortress. As of early 2025, it has around $118 B in cash & short-term investments (against roughly $14 B in debt), providing net liquidity for investments or capital returns. The company has been returning cash via share buybacks (over $59 B repurchased in 2024, plus a new $70 B authorisation in 2025) and dividends, while still retaining ample cash for strategic needs. Return on equity is high (30%) and Alphabet continues to deliver exceptional operating cash flow (over $91 B in 2024 cash from operations). In summary, Alphabet’s financial performance underscores a rare combination of large-scale growth and high profitability. The company is entering the next phase (AI and cloud-intensive) from a position of financial strength, which is a significant comfort for investors facing the uncertainties discussed earlier.

(Sources: Alphabet 2024 annual results, Q1 2025 earnings release, Visual Capitalist revenue breakdown.)

10-Year Discounted Cash Flow (DCF) Valuation

To estimate Alphabet’s intrinsic value, we perform a 10-year DCF analysis. The model projects free cash flows over 2025–2034, then adds a terminal value representing continuing cash flows beyond 2034. Key assumptions include:

• Revenue Growth: We assume double-digit growth in the near term (reflecting strong cloud and ad momentum), gradually slowing to low single digits by year 10. In our base case, revenue grows 10% in 2025, then tapers to 2% by 2034 (terminal growth). This reflects Alphabet’s large base, making high growth harder to sustain long-term, though AI and new ventures could provide upside.

• Profitability (EBIT Margin): Alphabet has recently operated around a 30–32% EBIT margin. We project margins in the low-30s %, with potential for slight expansion to 33% by 2030+ as Google Cloud becomes a larger, more profitable mix and as efficiency improves. This assumes the company balances heavy AI investments with cost discipline.

• Tax Rate: We use a 20% effective tax rate, in line with Alphabet’s recent global effective tax (the statutory US rate is 21%, and Alphabet has benefited from tax credits and international mix to keep effective taxes slightly lower).

• Depreciation & Amortisation (D&A): D&A is added back in cash flow since it’s a non-cash expense. We model D&A rising from roughly $18 B in 2025 (reflecting Alphabet’s large 2024 capex) to about $40 B by 2034 as the asset base grows. This aligns with Alphabet’s ramp-up in data centre investments; depreciation will increase as new servers and infrastructure are put into service.

• Capital Expenditures: We factor in Alphabet’s plan for very high capex in the immediate term to support AI and cloud. CapEx is assumed at $75 B in 2025 (per management’s guidance), then gradually moderating to $50 B by 2031 and beyond. Even at $50 B, capex would be 8% of revenue in 2034, reflecting ongoing data centre expansion and hardware investments, albeit at a lower growth-oriented pace than mid-2020s.

• Net Working Capital Changes: Google’s business requires little incremental working capital (it often enjoys negative working capital as it collects ad revenue quickly while paying partners on lag). For simplicity, we assume minimal net working capital change each year (≈ $0 in our model), so it’s not a major driver of cash flow.

• Discount Rate (WACC): We use an 8% weighted average cost of capital, which is a typical assumption for a large, mature tech firm with strong cash flows. This reflects a blend of the cost of equity and debt. Given Alphabet’s low debt and beta around 1, 8% is a reasonable middle-ground discount rate for its future cash flows.

• Terminal Growth Rate: We assume a 2% terminal growth in perpetuity after 2034, roughly in line with long-run global GDP/inflation expectations. This acknowledges that as one of the world’s largest companies, Alphabet’s growth will likely eventually track the broader economy. (For context, 2% terminal growth is conservative; if Alphabet can keep innovating, it might grow faster, but we balance this against saturation effects.)

Valuation Interpretation: The DCF outcome ($1.9–2.0 T EV) indicates that Alphabet’s stock price already reflects substantial growth and profitability. There is upside if Alphabet exceeds these projections – e.g. sustaining higher growth (through AI breakthroughs or other “Next Big Thing”), or achieving greater efficiency (lifting margins above 35%). Conversely, there is a downside if growth disappoints or margins erode (due to competition or costly investments). Small changes in assumptions can have a large impact: for instance, using a 9% WACC instead of 8% would reduce the EV to $1.73 T (roughly 8% lower). If the terminal growth were 3% instead of 2%, the EV would increase to $2.13 T. This sensitivity underscores that a company of Alphabet’s size, with decades of future cash flows, is greatly affected by the discount rate and long-term outlook.

Investors should consider this DCF as one scenario – it assumes Alphabet can navigate the next decade’s challenges (regulation, competition, AI disruption) while maintaining solid growth and margins. The valuation suggests that Alphabet’s stock is supported by strong fundamentals (extraordinary cash generation and competitive moats), but not deeply undervalued given the inherent risks. In summary, Alphabet remains a compelling long-term investment for its dominance and innovation, yet its sheer scale means future growth is naturally slowing. The margin of safety for investors is moderate, and the market will be keenly watching how Alphabet executes on AI and new ventures to extend its growth runway over the coming ten years.