Alphabet (GOOGL)

Online advertising giant Alphabet (NASDAQ:GOOGL) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 12% year on year to $90.23 billion. Its GAAP profit of $2.81 per share was 40.1% above analysts’ consensus estimates.

Key Topics & Areas Of Debate

AI is likely the hottest topic in the world of investing today. Regarding Alphabet, the debate is about how AI’s advancement will impact the company’s bread-and-butter Search business. It is a business where Alphabet has dominant market share, and it is also highly profitable.

Will the development of AI hurt Alphabet because OpenAI’s ChatGPT and even Microsoft’s Bing will take market share from Google, once thought to be nearly invincible in the online search market? Or will Alphabet’s Gemini product, first announced in December 2023, allow the company to dominate the Search market for years or even decades to come given its brand recognition?

As background, Gemini is designed to advance natural language understanding and meet certain thresholds in conversational and contextual understanding. In short, it is meant to provide even more accurate and personalized results, which would be a replay of what made Google so successful decades ago.

Despite its scale and dominance, Alphabet doesn’t operate in a vacuum. ChatGPT and Microsoft’s (NASDAQ:MSFT) new and improved Bing engine are current competitors to Google Search while Meta (NASDAQ:META) is extending beyond social media and into the online search market with its AI-powered assistant.

Alphabet runs into Microsoft often, as it is also one of its primary adversaries in the public cloud services market along with Amazon’s formidable AWS (NASDAQ:AMZN). Finally, Netflix (NASDAQ:NFLX), Disney (NYSE:DIS), and many other video streaming platforms go head-to-head against the company’s YouTube segment.

Started by Stanford students Larry Page and Sergey Brin in a Menlo Park garage, Alphabet (NASDAQ:GOOGL) is the parent company of the eponymous Google Search engine, Google Cloud Platform, and YouTube.

Alphabet proves that huge, scaled companies can still grow quickly. The company’s revenue base of $166.6 billion five years ago has more than doubled to $359.7 billion in the last year, translating into an incredible 16.6% annualized growth rate.

Alphabet’s growth over the same period was also higher than most of its big tech peers, Amazon (17.9%), Microsoft (14.3%), and Apple (8.1%). This is an important consideration because investors often use the comparisons as a starting point for their valuations. With these benchmarks in mind, we think Alphabet is cheap.

We at StockStory emphasize long-term growth, but for big tech companies, a half-decade historical view may miss emerging trends in AI. Alphabet’s annualized revenue growth of 12.4% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Alphabet reported year-on-year revenue growth of 12%, and its $90.23 billion of revenue exceeded Wall Street’s estimates by 1.2%. Looking ahead, sell-side analysts expect revenue to grow 9.8% over the next 12 months, a slight deceleration versus the last two years. This projection is still healthy and illustrates the market sees some success for its newer products.

The most topical question surrounding Alphabet today is: “Will new Generative-AI products like ChatGPT and Meta AI disrupt Google Search and its 80%+ market share?”.

Although OpenAI (creator of ChatGPT) doesn’t disclose its financials, we can gain further insight by comparing Google Search to Meta and Microsoft’s Bing. Meta essentially has a monopoly in social media advertising and is creeping into search with Meta AI, which is powered by its Llama large language model, while Bing is the distant number two search engine that benefits from its integration with ChatGPT.

Starting with Alphabet, Google Search is by far the most considerable portion of its revenue at 56.3%, and it grew at a 15.2% annualized rate over the last five years, slower than total revenue. The previous two years also saw deceleration as it grew by 11.4% annually, though this isn’t concerning since it’s still expanding quickly.

Google Search's two-year result was lower than Meta’s 18.8%, showing digital advertising dollars could be flowing to Meta because of its improved AI algorithms and targeting capabilities. Alphabet bulls would argue this trend could reverse because the return on investment from keyword-driven advertising is more tangible, but that hasn’t been the case lately.

Quarterly performance is particularly relevant for Alphabet because it captures the growth of AI and signals whether investors are overestimating its competitive impact. Google Search revenue met Wall Street’s consensus estimates in Q1 and recorded a year-on-year increase of 9.8%.

While this was slower than Bing’s 20%, it’s important to consider that Bing has a much smaller revenue base and doesn’t pose a significant threat yet. Still, Alphabet must either start topping Google Search projections or outperform in other segments like Google Cloud Platform and YouTube to satisfy the market.

Almost all modern internet applications are built on public cloud infrastructure. AWS is a massive success for Amazon, and it is no surprise that Alphabet wants a slice of the pie. But can it catch up?

Revenue in Alphabet’s Google Cloud Platform (GCP) grew at a spectacular pace over the last five years, clocking in at 36% annualized. On a two-year basis, growth was 28.3%. This was slower than its five-year rate, but it’s impressive nonetheless.

Since 2020, GCP has expanded from 5.9% of consolidated revenue to 12.8% today, and the segment’s size should increase over time as its growth is expected to outpace Search and the overall business.

However, when comparing GCP to its "hyperscaler" peers, we can see it’s far behind in third - its run-rate revenue (current quarter’s sales times four) is around $50 billion while AWS and Azure (a subset of Microsoft’s Intelligent Cloud segment) are on track for roughly $100 billion and $80 billion, respectively. GCP’s smaller revenue base makes it easier to grow, but the looming question is if it can ever catch up in scale and exhibit the same profit margins.

This quarter, GCP revenue grew by 28.1%, in line with expectations. Given the scale differences, GCP must consistently outgrow its rivals for an extended period to have any chance of besting the competition.

Online video streaming platforms make money through subscription fees, advertising, or some combination of both. Advertising is the bigger chunk of sales for YouTube, and like GCP, it is a smaller segment for Alphabet at 10.3% of revenue. Still, YouTube is a focus for investors given its large addressable market and 2.5 billion+ monthly active users.

Over the last five years, YouTube’s strong 18% annualized revenue growth outperformed the broader company. In recent years, however, the segment decelerated, as seen by its 12.8% two-year annual growth. This is still healthy, and some level of deceleration is expected with a large revenue base.

A comforting data point is that its growth was similar to Netflix’s 12.2% annualized rate over the last two years, though comparisons aren’t exactly apples-to-apples because Netflix mainly generates revenue through subscriptions (you can see this in YouTube’s choppier advertising revenue in the chart below). We’ll continue monitoring the situation closely as Netflix’s new ad-supported tier could increase competition for online video ad dollars.

In Q1, YouTube’s $8.93 billion of revenue met expectations and grew by 10.3% year on year. Despite the good print, the number was lower than its two-year result, suggesting its new initiatives like YouTube Creator Awards aren’t accelerating growth just yet.

Alphabet’s biggest source of revenue, advertising from Google Search, is also quite profitable. Its gross margin routinely punches in above 75% because its cost of goods sold is low - they mostly consist of traffic acquisition costs, or payments made to browsers and mobile carriers for directing web traffic to google.com.

The company’s other businesses like GCP and YouTube, with their data center and content costs, have lower gross margins than Search, so they drag overall unit economics down. Still, Alphabet’s consolidated gross margin is rock-solid as it averaged 56.7% over the last five years. This serves as a nice starting point for ultimate operating profitability and free cash flow.

Alphabet’s gross margin was 59.7% in Q1, up from 58.3% in the same quarter last year. That means for every $100 in revenue, $59.70 was left to invest in sales, marketing, R&D, and general administrative overhead.

Operating margin is the key profitability measure for Alphabet. It’s the portion of revenue left after accounting for all operating expenses – everything from the IT infrastructure powering online searches to product development and administrative expenses.

Alphabet has been a well-oiled machine over the last five years. It demonstrated elite profitability for a consumer internet business, boasting an average operating margin of 29%. A closer examination is required, however, because the company’s individual business lines have very different margin profiles.

The Google Services segment, which includes Search, YouTube, the Pixel smartphone, and other advertising revenues, boasted an average operating margin of 36.3% over the last five years (Search and YouTube standalone profitability is not disclosed).

Google Cloud is another story as it broke even at the same time. A bright spot was this quarter’s margin of 17.8%, which shows the business is gaining some operating leverage. Still, GCP’s most recent margin is well below AWS’s 36.9% quarterly print. GCP has a long way to catch up on both scale and margins, which isn’t surprising since the second dynamic very much depends on the first.

Putting it all together, Alphabet’s operating margin rose by 7.4 percentage points over the last five years. This expansion was driven by operating leverage across its businesses, and if Alphabet can avoid overhiring, company-level margins could tick even higher.

This quarter, Alphabet generated an operating profit margin of 33.9%, up 2.3 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Looking ahead, Wall Street expects Alphabet to maintain its trailing 12-month operating margin of 32.7% in the coming year.

We track the long-term change in earnings per share (EPS) alongside revenue and margins because it shows whether a company’s growth is profitable and what else affects shareholder returns.

Alphabet’s EPS grew at an astounding 29.3% compounded annual growth rate over the last five years, higher than its 16.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Alphabet’s earnings to better understand the drivers of its performance. As we mentioned earlier, Alphabet’s operating margin expanded by 7.4 percentage points over the last five years. On top of that, its share count shrank by 11.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Alphabet, its two-year annual EPS growth of 41.2% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Alphabet reported EPS at $2.81, up from $1.89 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Alphabet’s full-year EPS of $8.97 to stay about the same.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills or invest for the future.

Alphabet has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 22.8% over the last five years, quite impressive for a consumer internet business.

Taking a step back, we can see that Alphabet’s margin dropped by 5 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle as it competes for the best AI chips to power its products.

Alphabet’s free cash flow clocked in at $18.95 billion in Q1, equivalent to a 21% margin. This cash profitability was in line with the comparable period last year but below its five-year average. We wouldn’t read too much into it because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Alphabet’s free cash flow margin of 20.8% for the last 12 months to remain the same.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Alphabet’s five-year average ROIC was 41.8%, placing it among the best consumer internet companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Alphabet’s ROIC has unfortunately decreased. This is because it’s investing aggressively to capture the AI opportunity. Only time will tell if these investments bear fruit in higher long-term ROICs.

Big corporations like Alphabet are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Alphabet has an eye-popping $95.33 billion of cash on its balance sheet (that's no typo) compared to $19.38 billion of debt. This $75.95 billion net cash position is 4% of its market cap and shockingly larger than the value of most public companies, giving it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We liked that Alphabet beat analysts’ consolidated revenue, operating profit, and EPS expectations this quarter. On the other hand, Google Cloud and YouTube each missed Wall Street's segment revenue expectations by a small amount (Search's revenue beat drove the consolidated beat). Still, we think this quarter featured some important positives, especially amidst macro uncertainty. The stock traded up 4% to $165.40 immediately following the results.

Updated: May 21, 2025 at 10:21 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Alphabet is an amazing business ranking highly on our list. For starters, its superb long-term revenue growth driven by Google Cloud Platform signals it has an untapped market opportunity ahead of it. And while its falling cash profitability means it’s investing heavily to keep pace in the AI-race, its lean cost base results in a strong operating margin. On top of that, Alphabet’s stellar ROIC illustrates its historical ability to make home run bets like YouTube and Google Maps.

Alphabet’s price-to-earnings ratio based on the next 12 months is 18.6x. Looking across the spectrum of consumer internet companies today, Alphabet’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $200.56 on the company (compared to the current share price of $168.77), implying they see 18.8% upside in buying Alphabet in the short term.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.