Best Buy: Alphabet Inc. (Google)

Imagine a dominant company with a near-monopoly, trading at a P/E of 21 and a forward P/E of 19. With projected growth in the low teens, is it a buy? Maybe. Let’s break it down.

Alphabet is a buy. Not because it’s big, but because it’s everywhere.

Search. Cloud. AI. Ads. YouTube. Android. Alphabet isn’t just competing in tech—it is tech. Billions of people rely on it daily, often without thinking twice. That kind of scale isn’t just impressive—it’s nearly impossible to replicate.

Now look at AI. While others are catching up, Alphabet is shaping the game. It pioneered transformers, built DeepMind, and integrated AI across Search, YouTube, and Google Cloud. This isn’t a company adopting AI—it’s one that’s defining it.

Then there’s the business model. Cash flows like a machine. Ads fund the empire. Cloud is scaling. YouTube is a money-printing giant. AI is the next frontier. The result? A company that grows, innovates, and dominates—without breaking a sweat.

The market isn’t paying full attention. That’s an opportunity.

Happy reading!

---

1. Investment Thesis: Why Alphabet?

Alphabet is a Best Buy. Not just because it’s massive, but because it’s getting stronger.

Some see Alphabet as a tech giant coasting on its dominance. That’s a mistake. Under the surface, this company is a margin compounding machine. Search is expanding its profitability. YouTube is turning into an ad revenue powerhouse. Google Cloud is no longer a drag—it’s fueling operating income. And AI? AI is the long-term game-changer that supercharges everything.

Let’s break it down.

1. Search – The Ultimate Margin Expansion Play

Search isn’t just Alphabet’s cash cow—it’s the most profitable business in technology. Its dominance allows it to print free cash flow while quietly pushing margins even higher.

Key Metrics:

• 2024 Search Revenue: $180B (+9% YoY)

• Operating Margin: 40%+

• Operating Income Growth: Every $1B in new search revenue = $400M straight to the bottom line

Why Margins Keep Expanding:

• Cost-per-click (CPC) is up 5% YoY—advertisers are paying more for ad space.

• AI-powered search ads are boosting engagement and ROI.

• Automation is cutting costs while increasing pricing power.

The Bottom Line:
Search is a predictable, high-margin, cash-generating machine. And it’s only getting more efficient.

2. Google’s Overall Margin Expansion – The Silent Growth Driver

Alphabet isn’t just a growth company. It’s a company growing profitably. Revenue keeps climbing, but margins are rising even faster.

Financials:

• 2024 Revenue: $340B (+11% YoY)

• 2024 Operating Income: $102B (+14% YoY)

• Operating Margin: 30.0% (vs. 28.6% in 2023, 26.5% in 2022)

Why This Matters:
Even at this scale, Alphabet is improving profitability. That means more cash flow, more buybacks, and bigger EPS growth.

3. YouTube – The Sleeping Giant Waking Up

YouTube has always dominated video. But now? It’s finally becoming the profit machine Alphabet needs it to be.

Key Metrics:

• 2024 Revenue: $44B (+12% YoY)

• Operating Margin: 27% (vs. 22% in 2023, 18% in 2022)

• YouTube Shorts Monetization: 70B views per day

Why YouTube’s Margins Are Expanding:

• AI-powered ad targeting = higher ad engagement and pricing.

• Subscription revenue (YouTube Premium & TV) is growing 20% YoY, reducing reliance on ads.

• Lower Traffic Acquisition Costs (TAC) vs. Search = higher margins.

Future Growth:
By 2026, YouTube could be a $60B+ business with margins at 35%+—making it one of Alphabet’s biggest profit drivers.

4. Google Cloud – From Loss Maker to Profit Engine

For years, Google Cloud was Alphabet’s weakest link. Not anymore. Now, it’s driving real profit.

Key Financials:

• 2021: -$3B operating loss

• 2022: -$700M operating loss

• 2023: $2.2B operating profit (6% margin)

• 2024: $3.7B operating profit (9% margin, +68% YoY!)

Why Cloud’s Margins Are Expanding:

• AI & enterprise adoption are driving higher-margin workloads.

• Improved capex efficiency is lowering costs per unit of revenue.

• Google’s AI dominance (Vertex AI, Bard, Gemini) is giving Cloud a real edge.

The Long-Term Play:
If Google Cloud reaches 25%+ margins by 2027, it could add $15B+ in operating income—making it one of Alphabet’s biggest cash cows.

5. AI – The Long-Term Margin Explosion

AI isn’t just about growth—it’s about profitability. Alphabet is using AI to cut costs, optimize ads, and drive efficiencies across its empire.

How AI Directly Expands Margins:

1. Search & Ads Optimization → AI-powered bidding = higher CPCs without increasing costs.

2. YouTube AI-Ad Targeting → Higher ad engagement, better revenue per view (RPM).

3. AI-Driven Cost Cutting → AI is lowering expenses by automating workflows & reducing headcount growth.

4. Google Cloud AI → AI services (Vertex AI, Gemini, Bard) create high-margin revenue streams.

Bottom line: AI is not just a tech play—it’s a margin expansion machine across every part of Alphabet’s business.

6. Stock Buybacks – The Silent EPS Growth Engine

Alphabet’s buybacks are quietly supercharging EPS.

Buyback Impact:

• $70B in share repurchases in 2024

• Share count down 15% since 2019

• EPS growing faster than revenue due to buybacks + margin expansion

EPS Growth (YoY):

• 2022: $4.56 → $4.63 (+2%)

• 2023: $4.63 → $5.80 (+25%)

• 2024: $5.80 → $7.20E (+24% estimated)

Even if revenue only grows 12% annually, EPS could still rise 20%+ thanks to buybacks and expanding margins.

2. Secular-trend is Strong

Alphabet Inc., Google's parent company, leads the digital advertising industry. A market on the rise. A space transforming fast.

In 2024, global ad revenue crossed the $1 trillion mark. Growth continues. Projections show a 7.7% increase in 2025. By year’s end, digital ads will claim 73% of the total. The shift is clear. The future is digital.

Within this booming industry, Alphabet dominates. Google and YouTube, the twin giants, will drive massive ad revenues in 2025. The numbers matter. Analysts forecast Alphabet’s revenue to climb 11.9%, reaching $96.6 billion. A strong leap forward.

But Alphabet isn’t just coasting. It’s investing. In 2025, capital expenditures will soar to roughly $75 billion, a staggering 42.9% jump. Where does it go? AI. Servers. Data centers. The backbone of the next generation of advertising.

Meanwhile, the digital ad world shifts. Retail media surges—up 15.6%. Connected TV rises—13.8%. Social media expands—11.9%. The movement is undeniable. Alphabet aligns, pushing AI deeper into ad tech, strengthening YouTube’s grip, and expanding across platforms.

Challenges remain. Regulators watch. Competitors push forward. The AI race intensifies. But Alphabet is prepared. A leader in transition, steering toward a future shaped by digital ads, AI, and innovation.

The stage is set. The opportunities are vast. The game is Alphabet’s to win.

3. AI: Disruption or Opportunity?

Artificial Intelligence. A revolution. A disruption. An opportunity. For Google, it’s all three. AI shapes its future, redefining how it operates, competes, and earns.

Opportunities:

Enhanced User Experience. AI is everywhere. In search. In services. Google now delivers AI-generated overviews—concise, direct answers. No more sifting through endless links. Users get what they need, fast. Engagement rises. Satisfaction grows.

Operational Efficiency. AI isn’t just changing what users see. It’s changing how Google works. In October 2024, over 25% of new code wasn’t written by engineers. AI did it. Humans reviewed. Machines created. The result? Faster development. Quicker innovation.

Product Innovation. Gemini. A name that matters. A multimodal AI model, blending text, images, and more. Released in December 2023, it cemented Google’s place at the cutting edge of AI. A leap forward. A signal to competitors: Google isn’t slowing down.

Challenges and Potential Disruptions:

Revenue Model Impact. AI-generated search overviews answer questions instantly. No clicks. No site visits. No ads viewed. That’s a problem. Google’s traditional revenue stream? At risk. A shift is coming. Adaptation is required.

Increased Competition. The AI battlefield is crowded. DeepSeek and others are rising. Google is fighting back—$75 billion planned for AI infrastructure in 2025. A massive bet. A necessary move. But investors worry. Is it too much? Can Google outspend and outsmart the competition?

Legal and Ethical Risks. Lawsuits loom. Chegg claims AI-generated content drained its traffic, hit its revenue. The courts will decide. But the message is clear—AI isn’t just about innovation. It’s about responsibility. Regulation is coming. Ethical debates will follow.

The Road Ahead

AI opens doors. AI closes others. For Google, the challenge is balance. Innovation vs. risk. Growth vs. regulation. Opportunity vs. disruption. The future is uncertain. But one thing is clear: AI isn’t just a tool. It’s the game itself. And Google must play to win.

4. Valuation

‘‘Invert, always invert’’—Charlie Munger

And invert we will. Flip the script. Let’s break it down with a reverse DCF.

What’s the market saying? A 12.20% YoY growth in free cash flow for the next decade. That’s the expectation. But does it make sense?

Not to me.

I see Alphabet growing faster. 16% to 18% YoY. A big gap. A telling gap.

The takeaway? Alphabet is undervalued.

Full disclosure: I bought GOOGL Alphabet Class A shares today (27-02-2025) for $170.96.

And that is it for today!

PS…. if you’re enjoying FluentInQuality, can you take 3 seconds and refer this edition to a friend? It goes a long way in helping me grow the newsletter (and bring more quality investors into the world). Whenever you get a friend to sign up using the link below, you will be one step closer to some fantastic rewards.

Lastly, I would love to hear your input on how I can make FluentInQuality even more helpful for you! So, please leave a comment with:

• Ideas you’d like covered in future posts.

• Your takeaways from this post.

I read and respond to every comment! :-)

And remember…

Great investments don’t shout—they compound quietly.

- Yorrin (FluentInQuality)

Useful Sources

• Finchat is used for all the charts and analysis. You can now get 15% off from your subscription. Click here and start today!

(I’m affiliated with Finchat, but not sponsored. With this link, your plan does NOT get more expensive; I only get a small cake cut. Thank you in advance)

Disclaimer

By reading my posts, subscribing, following me, and visiting my Substack in general, you agree to my disclaimer. You can read the disclaimer here.