A review of Alphabet's earnings and current valuation

I've consistently been bullish on Google and YouTube parent Alphabet (GOOGL) ever since I named it as a core holding in my old firm Empire Financial Research's first newsletter on April 17, 2019. Since then, it's up 233% (through yesterday's close) versus 108% for the S&P 500 Index.

The company released fourth-quarter earnings yesterday, so let's take a look... (You can see the full earnings release here and the 10-K here.)

Alphabet reported $96.5 billion in revenue – up 12% year over year ("YOY") and slightly trailing estimates of $96.7 billion. Google Cloud revenue was $12 billion, up a robust 30% YOY – but that was down from a 35% rise in the previous quarter and missed analysts' estimates of $12.2 billion.

Alphabet did an excellent job controlling expenses, which only rose 5%, so the company's operating margin grew from 27% to 32% YOY, and operating income jumped 31%.

Diluted shares declined 2% thanks to $61.5 billion of share repurchases in 2024.

As a result, earnings per share came in at $2.15, ahead of estimates of $2.13 and up an exceptional 31% YOY.

It's simply astounding that a company of this size – with trailing 12-month revenue of $350 billion – can still be growing this quickly and this profitably.

By any metric – growth, margins, profits, cash flows, etc. – it was a great quarter. Its stock even hit an all-time high yesterday.

So why was it down around 7% this morning?

Well, in part, the stock seems to be taking a breather after a huge run over the past two years, as you can see in the chart below. (I was pounding the table on Alphabet and the other tech giants at their lows in late 2022.)

Investors also found a few things to nitpick...

Mainly, investors didn't like the guidance that capital expenditures ("capex") – which were $52.5 billion in 2024, up 63% from $32.3 billion in 2023 – are projected to grow to $75 billion in 2025, as Alphabet invests heavily in the AI arms race.

With the emergence of the low-cost AI model DeepSeek, investors are questioning whether tech giants need to keep spending as intensely as they have been.

Investors are also worried whether generative-AI-powered chatbots could threaten Google's dominance in search.

For more color, here's the story from the Wall Street Journal: Google's Revenue Growth Slows, Sending Shares Down. Excerpt:

In response to a question about Chinese AI on a call with analysts, [CEO Sundar] Pichai said Google's Gemini AI was leading the market, and the company has made strides in cost reductions.

"All of that sets us up well for the workloads ahead, both to serve billions of users across our products and on the cloud side," Pichai said.

Google said the numbers of developers using Gemini models doubled from six months ago to more than 4.4 million. It offers access to Gemini through its cloud division...

Alphabet Chief Financial Officer Anat Ashkenazi said the cloud business exited the year with more customer demand than available capacity, and it was working to build more.

This WSJ Heard on the Street column focuses on the AI arms race: The AI Spending Race Is Still On as Google Antes Up. Excerpt:

A Chinese AI startup called DeepSeek raised questions about just how much computing power is really needed to build advanced AI models...

But Big Tech leaders have since pushed back hard on that idea, noting that more powerful computing will still produce better quality AI. Meta Chief Executive Mark Zuckerberg said on his own earnings call last week that the ability to invest "very heavily" in capex would be a strategic advantage for companies with the means to do it. On Tuesday's call, Pichai said Google's approach to AI development already produces a lot of efficiencies given the company's focus on lowering cost per query. "It's as big as it comes, and that's why you're seeing us invest to meet that moment," Pichai said of the AI opportunity.

Google at least has a few advantages here. Its lucrative search advertising business is still going strong; operating margins for its Google Services segment hit 39% in the latest quarter compared with 35% in the same period the previous year. And while its cloud revenue growth disappointed, Google Cloud's operating income more than doubled year over year to just over $2 billion in the latest quarter.

Alphabet also has the highest net cash balance of its peers; $99 billion compared with Microsoft and Meta at $42 billion and $49 billion, respectively. In an AI spending match, the deepest pocket can't afford to sit on the bench.

Finally, let's look at Alphabet's valuation...

At this morning's price around $191, the stock trades at 21.4 times this year's earnings estimates of $8.94 per share, which is slightly below the 22.2 times forward multiple of the S&P 500 today.

It makes no sense that one of the greatest businesses of all time trades at a lower multiple than the average large U.S. business.

My view today – as it has been for more than five years – is that Alphabet is a great stock for conservative, long-term-oriented investors.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.