Alphabet Inc. (NASDAQ:GOOGL) Stock Analysis: AI-Driven Growth at a Discount

Alphabet Inc. (NASDAQ:GOOGL) Defies AI Disruption Narrative as Vertical Integration, AI Adoption, and Cloud Margins Reprice the Stock

Search Revenue at $198B Underscores Sticky Dominance and 90% Market Share

Alphabet Inc. (NASDAQ:GOOGL) continues to dominate the global search ecosystem, driving $198 billion in ad revenue in 2024, over 56% of its total top-line. Despite the AI boom and aggressive expansion of ChatGPT and other LLMs, Google Search retains a 90% market share, reinforced by habit-driven usage and multi-decade data advantages. A $10 incentive experiment by Wharton found only 33% of users stuck with Bing, and 65% of those did so out of inertia, not preference. The moat isn't just scale—it's the precision of results built on Google’s integrated data streams from YouTube, Maps, Chrome, and Gmail.

AI Disruption Narrative Unravels as Gemini Surges and TPUs Slash Compute Costs

The idea that GOOGL is being outflanked in AI has lost credibility as Gemini now commands 350 million MAUs, up from just 9 million in October 2024. While still trailing ChatGPT’s 600M and Meta's 500M MAUs, Gemini’s deep integration into core services such as Gmail and Docs provides strategic leverage. Unlike OpenAI and Anthropic, Alphabet builds on proprietary TPUs rather than Nvidia's A100/H100 chips, giving it a critical edge in scaling AI affordably. With compute costs often comprising over 50% of AI workloads, internal TPU design and manufacturing insulate Alphabet from Nvidia supply bottlenecks and pricing power, creating a long-term margin advantage.

YouTube and Google Cloud Now Drive Margin Expansion at Scale

YouTube Premium and Music subscriptions surpassed 270 million, while YouTube Ad and Sub combined revenues are projected to grow from $54.6B in 2024 to $98.6B by 2029 at a 13% CAGR. EBIT margins for YouTube are forecasted to rise from 10% to 14.5%, contributing materially to Alphabet's consolidated margin expansion. Meanwhile, Google Cloud delivered $12.3B in Q1 2025 revenue, up 28% YoY, with operating margins doubling to 17.8%. This segment now represents Alphabet's second key growth pillar, complementing its ad business with AI infrastructure that is beginning to rival AWS in scale and cost-performance.

Valuation Still Lags Despite Beating EPS by 40% in Q1 2025

In Q1 2025, Alphabet posted EPS of $2.81, beating expectations by nearly 40% and marking the strongest earnings surprise since 2021. Revenues came in at $90.23 billion (+12% YoY), driven by resilient Search growth (+10%) and expanding AI usage with 1.5 billion users engaging with AI Overviews. Despite this, the forward P/E remains just 18x, significantly below the 26.8x average for Magnificent Seven peers. Based on an EFY26 EPS estimate of $10.14 and a justifiable 26x multiple, GOOGL should trade at $264, offering over 40% upside from current levels.

GOOGL Insider Transactions Support Bull Thesis

Insider activity remains modest but constructive. Use this link to monitor real-time insider transactions. In 2024, Alphabet repurchased $62 billion worth of shares and still has $44.7 billion remaining under its authorization, representing 1.2% of voting shares and 5.4% of non-voting shares. The firm also initiated a 0.47% dividend while keeping a pristine balance sheet: $95.7B in cash versus just $10.9B in debt. This capital discipline enhances shareholder return in a tech sector often criticized for dilution.

Antitrust Fears Overblown as Remedies Favor Alphabet's Ecosystem

Alphabet’s antitrust battle over its $26.3 billion in browser payments (e.g., Safari search default) is a risk, but remedies are likely to resemble the EU's Android precedent—a search engine choice screen rather than structural divestitures. Forced divestment of Chrome is unlikely, as Chrome’s integration with Google Accounts, Gmail, and security infrastructure makes it technically inseparable. Similarly, breaking off AdX would benefit rivals like Amazon more than consumers, likely failing judicial review. We see limited earnings impact from these cases.

GOOGL's Sum-of-the-Parts Valuation Suggests Market Mispricing

If YouTube was valued like Netflix at 19x P/S, and GCP at a blended 25.25x P/S similar to OpenAI/Anthropic, the standalone valuation for just those two divisions exceeds $2.66 trillion. That’s 24.7% above Alphabet’s current total market cap, implying the market is giving Google Search, Chrome, Maps, Android, and other bets virtually no premium. Even Goldman Sachs, with more conservative assumptions, targets 32% upside from today’s price.

CapEx Spike Signals Long-Term AI Infrastructure Bet, Not Margin Decay

CapEx is projected to rise 42.8% to $75B in 2025, focused on expanding data center footprint for AI workloads. While depreciation may temporarily compress margins, this is a forward bet on AI and Cloud scale, with most new capacity coming online in H2 2025. It is important to distinguish this CapEx from one-time projects; Alphabet is clearly reinvesting its record $72.8B in free cash flow for strategic long-term dominance.

Search Disruption by LLMs Lacks Conviction in User Data

Despite fear-mongering around ChatGPT displacing Google, surveys show only 14% of monthly AI users engage daily, with most using LLMs for creative or complex queries rather than transactional or navigational search—the latter being Google’s most monetizable segment. Alphabet executives emphasized that AI actually increases user engagement with Search, adding features like AI summaries to sustain relevance. A Morgan Stanley survey noted a 500bps gain in Google use among users aged 16-24. The erosion thesis lacks empirical support.

Final Verdict: Alphabet (NASDAQ:GOOGL) Is a Strong Buy

The market continues to discount NASDAQ:GOOGL as a disrupted incumbent rather than a vertically integrated AI enabler. With $264 in fair value based on earnings power and a sum-of-parts that prices Search as a free add-on, the risk-reward skew is deeply asymmetric. AI infrastructure, Cloud margin expansion, and sticky Search dominance all support upside. Investors can track the real-time stock chart for entry points. This is not just a buy. It's a strong buy on facts, not narratives.

That's TradingNEWS