Google is a great business (thanks to ad revenue from search dominance, growing cloud and AI megatrends, and other big bets like driverless Waymo), and its new earnings release crushed expectations and demonstrated extreme financial strength, despite growing big risks (such as antitrust pressures, concentrated revenue from search ads and scary-massive capital expenditure plans). I review the details, and conclude with my opinion on investing.
Overview: 3 Reasons Alphabet is Great
Alphabet Inc (GOOGL), the parent company of Google, is a massive part of the technology sector that continues to grow and innovate. Here are three specific reasons why Google is a great business:
Dominance in Digital Advertising:
Google controls roughly 90% of the global internet search market, and YouTube is the leading streaming platform in the world. This allow the company to leverage user data for targeted advertising that delivers high returns for advertisers, and thereby creates a sticky ecosystem that drives powerful revenue growth. Google generates approximately 75% its revenue from ads (mainly Google Search and YouTube).
Rapid Growth in Cloud and AI:
Google Cloud is a major growth engine for the company, with Q4 2024 revenue increasing 30% to nearly 12 billion (thanks to strong demand for AI-powered solutions). And the company’s full-stack AI capabilities (e.g. its Gemini 2.0 model and Vertex AI platform—which experienced 5x customer growth and 20x usage growth in 2024), position it as a leader in the AI megatrend.
And considering Google Cloud’s expanding infrastructure, Alphabet is well-poised to capture a growing share of the $300 billion cloud computing market and diversifying its revenue beyond advertising.
Innovation with Big Upside:
In terms of “Other Bets,” Google’s Waymo (its autonomous driving unit) grew from 10,000 weekly paid rides two years ago to over 250,000 in Q1 2025 (it operates in San Francisco, Los Angeles, Phoenix, and soon Austin and Atlanta). Waymo is targeting the $1 trillion autonomous ride-hailing market, potentially adding $4.5 trillion to the company’s market cap by 2035. That’s a high-upside big bet that could complement Alphabet’s core ad and cloud businesses.
Key Earnings Takeaways
Alphabet release earnings on April 24th, and the results were compelling. Here are three key takeaways from the release.
Growing Beyond Expectations:
Alphabet reported Q1 revenue of $90.2 billion, a 12% year-over-year increase, with earnings per share (EPS) climbing to $2.81, nearly 50% above analyst consensus estimates (of ~$2.02). And operating margins improved from 32% to 34%. These impressive results show Google’s strength despite market risks and challenges (more on these later).
Ongoing Cloud Momentum:
The Cloud megatrend continues (it has a lot of room for growth, especially thanks to AI), and Google is benefiting. Specifically, Google’s Cloud revenue grew 28% year-over-year (impressive!), and the segment’s annual revenue run rate, combined with YouTube, reached $110 billion (surpassing Alphabet’s initial $100 billion target).
For color, Google’s cloud growth is fueled by AI solutions like Vertex AI and infrastructure expansions, positioning it as a significant competitor to #1 and #2 cloud providers, Amazon Web Services and Microsoft Azure, respectively.
However, worth mentioning, capacity constraints were noted as a challenge on the call, indicating Google’s need to keep scaling infrastructure to meet demand.
Shareholder-Friendly Capital Allocation:
Alphabet announced a 5% dividend hike and a $70 billion stock buyback program, signaling strong confidence in ongoing cash flow generation (and a commitment to returning value to shareholders).
Free cash flow remains robust, supporting both cloud/AI growth, “moonshot” projects (like Waymo) and shareholder rewards. These moves demonstrate the business’ maturity and appeal to both income-focused and growth-focused investors.
Valuation:
Like most technology company shares, Google shares are down significantly this year (even after the strong post-earnings price pop), and now trading at around 16x 2025 earnings estimates (which is attractive considering the growth). In particular, Google’s 5-year expected EPS growth rate is 16.5% (impressive) and it trades at a forward PEG (price-to-earnings / growth) of only 1.1x (also impressive considering the high-growth megatrend trajectory).
Big Risks
Despite the compelling business growth and ongoing cloud/AI megatrend opportunities, investors should also consider the risks of investing in Google, such as the following three big ones.
Regulatory and Antitrust Risks:
Google faces ongoing regulatory risks globally, particularly over its dominance in search and digital advertising. Antitrust lawsuits, such as those from the U.S. Department of Justice, could lead to fine and forced divestitures (which could severely distrupt its powerful ecosystem). Additionally, data privacy concerns could increase compliance costs and limit “data-driven” advertising.
Dependence on Ad Revenue:
Despite diversification efforts, advertising still accounts for ~75% of Google’s total revenue. This concentration makes it vulnerable to economic downturns, shifts in advertiser spending and regulaory shifts and risks (as described above).
Additionally, competition from platforms like Meta and new AI technologies may erode Google’s search dominance and ad revenue, especially if cost-effective AI alternatives emerge.
Massive Capital Expenditures Ahead:
Google plans to spend $75 billion on capex in 2025, primarily for AI and cloud infrastructure. This is huge and well above Wall Street’s $58.8 billion estimate. Such aggressive spending may be necessary to compete with Microsoft and Amazon in AI, but could strain margins if returns don’t immediately materialize. Moreover, new AI players like OpenAI and DeepSeek pose threats. If Google cannot maintain its tech superiority, returns will suffer.
The Bottom Line:
Google is an absolute powerhouse in the tech sector (thanks to its search dominance, high-growth in cloud/AI megatrends, and high-potential bets including Waymo). Its impressive Q1 earnings reinforces its financial strength, and the valuation is relatively attractive (especially considering the expected ongoing growth).
However, investors should also consider the big regulatory risks, advertising concentration and scary-massive AI capex plans when deciding IF they want to own shares (and in what weight relative to their other holdings).
Considering the megatrend growth trajectory and year-to-date price declines (despite fundamental business improvement), I am long Google, and it is a relatively significant portfolio weight.
At the end of the day, you need to do what is right for you, based on your own personal situation. Disciplined, goal-focused, long-term investing remains a winning strategy.