Figure 1: Alphabet trails the S&P 500 after earnings
Alphabet shares slide as cloud growth slows and AI spending surges
Table 1: Key financial highlights
4Q23 | 4Q24 | % Change | FY23 | FY24 | % Change | |
Revenues | 86,310 | 96,469 | 12% | 307,394 | 350,018 | 14% |
Operating Income | 23,697 | 30,972 | 31% | 84,293 | 112,390 | 33% |
Net Income | 20,687 | 26,536 | 28% | 73,795 | 100,118 | 36% |
Earnings per Share (USD) | 1.64 | 2.15 | 31% | 5.80 | 6.04 | 39% |
Source: Alphabet. Data as of 4 Feb 2025. Figures are in USD millions unless otherwise stated. | ||||||
Cloud growth should reaccelerate once supply constraints ease
Figure 2: Alphabet’s margins have been improving despite of its high CapEx
Figure 3: Google Cloud’s market share has been steadily increasing
Search dominance remains intact in spite of rising competition
Figure 4: Google’s Circle to Search
Source: Google Blog
In October 2024, Google also enhanced its visual search app, Google Lens, by introducing video and voice input, expanding its capabilities beyond photo and text-based search. In other words, users can now search by taking a video and asking questions about the moving objects that they see.
Figure 5: Google Lens now supports video and voice input
Source: Google Blog
By making Search more effortless to use and expanding the range of questions that people can ask, Google is well-positioned to increase its search volume over time and fend off competition from AI players such as OpenAI and Perplexity.
Crucially, Google has already begun monetising its AI-powered search results with ads. In October 2024, it began featuring ads in AI Overview responses for mobile users in the US, with monetisation rates on par with traditional search ads. Additionally, it has started displaying shopping ads alongside visual search results from Google Lens, further integrating ads into its evolving search experience. These efforts have helped Google achieve a 13% YoY increase in its Search revenue for Q4 2024. On an annual basis, Search revenue has also continued to grow despite the launch of ChatGPT in late 2022 (Figure 6).
Figure 6: Search revenue has continued to grow even after the launch of ChatGPT
Antitrust fears are overblown
In addition to increased competition in the Search market, Alphabet is also contending with multiple antitrust lawsuits that are weighing on the company's stock, the biggest of which is the Google Search antitrust case. On 5 August 2024, US district judge Amit Mehta ruled that Google had acted illegally to maintain a monopoly in online search by paying companies such as Apple and Samsung to be the default search engine on mobile devices and browsers.
In November 2024, the Department of Justice proposed a slew of remedies to address Google’s monopolistic practices including requiring Google to syndicate its search results, ranking signals, and query data to competitors at a marginal cost, selling Chrome, and ending exclusive agreements with companies that make Google the default search engine. While some of these remedies may have a material impact on Google’s revenue streams, it is unlikely that they will be implemented in their current form.
For starters, mandating the sharing of proprietary information such as ranking signals, which Google has developed over years of testing and refinement, would set a dangerous precedent across industries and diminish the incentive for companies to innovate.
The divestment of Chrome is also improbable, as finding a suitable buyer is challenging. Chrome, on its own, generates no revenue and only makes sense within a search and advertising ecosystem. Potential buyers, such as Meta and Amazon, already hold monopolistic power in their respective domains; allowing them to acquire Chrome would undermine the DOJ’s goal of fostering fair competition by merely shifting power from one monopoly to another.
While the ban of exclusive agreements with phone-makers and browser companies to make Google the default search engine seems likely, we expect the impact on Google Search’s market share to be minimal. Consumers are creatures of habit, and as long as Alphabet continues to innovate and adapt to changing search preferences, it is likely to remain as the preferred search engine.
A two-week trial will be held in April to decide on the appropriate remedies and Judge Mehta plans to issue a ruling in August. Even if he were to accept the DOJ’s recommendations, Google will undoubtedly appeal, potentially prolonging the legal battle for years. While a breakup of Alphabet is unlikely, history suggests that it could benefit shareholders. In the landmark 1911 antitrust ruling, energy giant Standard Oil was forced to break up into 34 separate companies, and that ultimately resulted in a five to six-fold increase in their combined market capitalisation.
Separately, on February 4, China’s State Administration for Market Regulation (SAMR) announced an antitrust investigation into Google following Trump’s decision to impose a 10% tariff on all Chinese imports. While the SAMR did not provide further details, some believe the probe will focus on Google’s Android operating system. We expect the impact of this probe to be minimal, as most of Alphabet’s services are unavailable in China. According to Reuters estimates, China contributes only about 1% of Alphabet’s total revenue.
The sell-off is a good buying opportunity for investors
Figure 7: Alphabet offers a compelling value proposition relative to its peers
Table 2: Projections for Alphabet’s earnings
|
Alphabet |
2023 |
2024 |
2025E |
2026E |
|
Earnings Per Share (EPS) |
6.12 |
7.91 |
9.20 |
10.70 |
|
Earnings Growth YoY |
25.93% |
29.25% |
16.31% |
16.30% |
|
PE Ratio (X) |
22.83 |
22.71 |
19.53 |
16.79 |
|
Upside Potential (based on a fair PE Ratio of 22X) |
12.7% |
31.0% |
||
|
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 21 February 2025 |
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Figure 8: Share prices are driven by earnings growth in the long run
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