Earnings in Charts: Google's Core Business Prints Money as Always. Does High CapEx Even Matter?

$Alphabet(GOOGL)$   announced its first quarter financial report for 2025 on April 24th (as of March 2025). Key points are as follows:

1) Overall Revenue

Its revenue reached $90.23 billion, exceeding the expected $89.32 billion. The operating profit margin continued to improve to 34%, showing no signs of pressure from increased expenditures.

Both costs and expenses were optimized, raising the gross margin to 59.7%. Sales expenses decreased year-over-year and continued to be strictly controlled. R&D expenses continued to expand, growing 14% year-over-year, and the 2,400 new employees added in Q1 are primarily from R&D.

2) Advertising

Google's Search and other revenues grew to $50.7 billion in the first quarter, up from $46.16 billion in the same period last year, slightly exceeding the expectation of $50.5 billion. 

While advertising growth has slowed down, Google's advertising ecosystem includes a significant number of service consumption ads such as travel and healthcare. The proportion of other consumer ads like retail is lower than that of its competitors. As a result, the actual impact on Google is less severe compared to its peers. However, the further impact in the second quarter still needs further observation.

3) Youtube

YouTube's advertising revenue climbed to $8.93 billion, up from $8.09 billion in the same period last year.

4) Cloud Business

Cloud business revenue increased to $12.26 billion, up from $9.57 billion in the same period last year, meeting expectations. Fortunately, the operating profit margin of the cloud business continued to improve. Last quarter, Google's backlog of contracts grew by 26% year-over-year, though the growth rate has slowed. The slowdown may be related to supply issues in the short term. During the Q4 earnings call, management mentioned that due to insufficient server supply, including computing power, customer demand was not fully met and had to be suppressed.

5）Stock Buyback

In the first quarter, $15.1 billion was spent on buybacks and $2.4 billion was distributed as dividends. In the context of an uncertain macro environment and high investment pressures on profit margins this year, continuous buybacks by the management are expected to provide a floor for valuation. Although nearly $10 billion of the $70 billion buyback announced in the same period last year remains unused, the company has decided to increase the buyback by another $70 billion.

6）Capital Expenditures

Alphabet's capital expenditures reached $17.2 billion in the first quarter. The arms race in AI continues, and despite the compute deflation brought by DeepSeek, Google has not adjusted its investment expectations (reiterated a $75 billion Capex at the mid-April GCP Next conference; recruitment efforts remain strong since the beginning of the year), which mostly affects a new balance of internal costs, increasing R&D while reducing expenditures in sales, administration, etc.

Overall, Google delivered better-than-expected financial results, primarily due to its strong core cash cow products and rapidly growing cloud business. Google typically does not provide explicit earnings guidance. 

In the second quarter, automotive and travel advertisements, which account for a significant portion of Google's advertising revenue, might reverse the strong trend seen in the first quarter due to the impact of tariffs. However, if the market gradually absorbs the effects of tariffs in the second half of the year, Google could potentially see a recovery.

In recent years, investors have been focusing on Google's capital expenditures as a key factor in assessing its stock price, while overlooking its robust core business. Even though the stock price has rebounded in recent trading days, its PE valuation is still at the cheapest 5th percentile of the past decade.

~ Google AI, Closer to Monetization

1. Last year's launch of AI Overview greatly helped increase user search activity, consolidating Google's search empire to some extent. In terms of daily active users, growth has continued to increase since last year. In a statement, CEO Sundar Pichai noted that Google’s AI Overviews in Search are now used by "1.5 billion users per month." Despite initial challenges, including some questionable suggestions shortly after launch, the company has progressively enhanced the tool, updating it to support a broader range of query types.

2. Earlier this month at the Google Cloud Next 25 conference, Google launched the Agent2Agent Protocol (A2A). A2A aims to provide a universal language for collaboration between agents, facilitating communication and cooperation among agents from different systems and providers, enhancing productivity, and reducing integration costs. In the industry, only Anthropic's Model Context Protocol (MCP) is comparable to A2A.

The A2A protocol itself will not directly generate revenue for Google, but the company expects to promote the development of the agent ecosystem through A2A, attracting more enterprises and developers to use Google Cloud services and other related products.

~ What Should Investors Be Concerned About?

1. The Trump administration's cancellation of the tax exemption policy for small parcels could impact the demand from advertisers in the Asia-Pacific region. The current outlook for advertising depends entirely on the progress of tariff negotiations. Without substantial positive developments, businesses will be more cautious with their advertising budgets. If the negotiations do bring good news, any change in business attitudes is unlikely to be reflected until at least the third quarter. Additionally, the antitrust lawsuit by the U.S. Department of Justice and a collective lawsuit in the UK (claiming £5 billion) pose potential threats.

2. As the pace of AI development continually surpasses our expectations, AI platforms might somewhat impact the traffic of traditional search portals, especially considering that Gemini's MAU (Monthly Active Users) is significantly lower than that of ChatGPT. 

Since the beginning of this year, as ChatGPT announced the opening of its search capabilities, allowing the use of OpenAI 3-mini and other basic inferencing models without registration, ChatGPT's traffic has rapidly increased. However, according to Statcounter data, Google still held 89.74% of the global market share in search engines as of March 2025.

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