Alphabet has Risen After its 1Q 2025 Earnings Beat

employee
Tiger_James Ooi
05-05

Source: CNBC, 26 April 2025Source: CNBC, 26 April 2025

Here’s how the $Alphabet(GOOG)$ did in 1Q 2025:

  • Year-on-year (YoY) growth in revenue and operating income has been uneven.

  • In 1Q 2025, revenue grew 12% YoY, while operating income rose 20.16%. However, both figures reflect a slowdown compared to 1Q 2024, when revenue and operating income grew 15.41% and 46.26%, respectively.

  • Operating income has maintained YoY growth of over 20% for seven consecutive quarters, though the 1Q 2025 figure marks the slowest increase during that period. However, Operating Margin reached 34% in the latest quarter — the highest level in five years.

  • Both gross margin and operating margin improved in 1Q 2025, rising to 59.7% and 33.92%, up from 58.14% and 31.63% in 1Q 2024.

  • That said, operating margin has remained range-bound between 31% and 34% over the past five quarters, suggesting limited upside in margin expansion.

Source: Tiger Brokers, Bloomberg, 1 May 2025Source: Tiger Brokers, Bloomberg, 1 May 2025

Google Cloud:

  • Google Cloud accounted for 27.7% of Alphabet’s total revenue growth and 24.87% of its operating income growth in 1Q 2025. It now makes up 13.6% of total revenue and 7.1% of total operating income — both record highs — highlighting the cloud segment’s growing importance to Alphabet's overall business.

  • In 1Q 2025, Google Cloud revenue rose 28.06% YoY, while operating income surged 141.89% YoY, maintaining its position as Alphabet’s fastest-growing segment over the past year.

  • The segment continues to deliver expanding profitability, with operating profit margin improving to 17.8% in 1Q 2025, up from 9.4% in the same period last year.

  • By comparison, Microsoft Cloud (including Azure) and Amazon AWS reported operating profit margins of 41.5% (1Q 2025) and 36.9% (4Q 2024), respectively.

  • This suggests that Google Cloud’s operating margin could further expand, potentially approaching those of Microsoft and Amazon, as it gains greater economies of scale.

  • As of 4Q 2024, Google Cloud ranked third globally with a 12% market share, compared to Amazon AWS at 30% and Microsoft Azure at 21%.

Source: Tiger Brokers, Bloomberg, 1 May 2025Source: Tiger Brokers, Bloomberg, 1 May 2025

Source: Tiger Brokers, Bloomberg, 1 May 2025Source: Tiger Brokers, Bloomberg, 1 May 2025

Source: Tiger Brokers, Bloomberg, 1 May 2025Source: Tiger Brokers, Bloomberg, 1 May 2025

Google Services:

  • Google Services contributed 85.6% of Alphabet’s total revenue in 1Q 2025. However, its advertising-related revenue growth continues to lag behind Meta.

  • Total revenue from Google Services rose 9.75% YoY in 1Q 2025, a deceleration from 13.62% in 1Q 2024. In comparison, Meta posted 16% YoY revenue growth in the same period.

  • Google Advertising revenue — which includes Google Search, YouTube Ads, and Google Network — grew by 8.48% YoY, down from 13.04% in 1Q 2024.

  • Operating income for Google Services also slowed, increasing 17.15% YoY in 1Q 2025, compared to 28.34% in 1Q 2024. By contrast, Meta's operating income rose 27% in the latest quarter.

  • Traffic Acquisition Costs (TAC) as a percentage of Google advertising revenue have remained stable and healthy, consistently within the 20–21% range over the past five quarters.

Other Bets:

  • Revenues from Other Bets are primarily derived from healthcare-related services and internet-based services.

  • Waymo, a key player in the robotaxi market and one of the few to have launched commercial autonomous ride-hailing services, is part of this segment.

  • However, investors should temper expectations regarding Waymo’s impact, as:

    • The Other Bets segment (including Waymo) contributed only 0.5% of Alphabet’s total revenue in 1Q 2025.

    • The segment has consistently recorded operating losses exceeding $1 billion for the past five quarters.

Source: Tiger Brokers, Bloomberg, 1 May 2025

Competitive Advantage:

Alphabet’s vast global user base provides a powerful foundation for monetization and AI integration across services — forming a growing competitive moat.

  • Scale of Reach:

    • Gmail: 2.5+ billion active users

    • YouTube: Over 1 billion monthly podcast users; 125M+ Music & Premium subscribers

    • Gemini AI now integrated across all 15 major Google products — each with over 500M users

    • AI Overviews in Google Search now serve 1.5 billion monthly users

    • Waymo: Over 250,000 weekly paid rides — 5x YoY growth

  • AI as a Strategic Moat:

    • Gemini platform powers consumer and enterprise AI experiences, with user activity in AI Studio and Gemini API up over 200% YTD

    • Vertex AI offers over 200 AI models for enterprise clients, reinforcing Google Cloud's AI ecosystem

    • The Wiz acquisition enhances cloud security, strengthening Alphabet’s multi-cloud AI strategy

  • AI Launches:

    • Alphabet is advancing its AI roadmap with the launch of Gemini 2.5 Flash (a cost-optimized model), Gemini Robotics (focused on physical agents), and AI Co-Scientist (designed for research and development use cases), positioning the company at the forefront of applied AI innovation.

Capex:

Alphabet maintained a high level of capital expenditure at $75 billion in 2025, up 43% year-on-year from $55 billion in 2024, indicating that investment in AI infrastructure remains robust and that the AI growth cycle is far from peaking.

Key Risks:

  • Stagnant Operating Margins: Alphabet’s overall operating margin has hovered between 31% and 34% for the past five quarters, while Google Cloud's operating margin has remained flat at 17–18% over the past three quarters — raising concerns about further margin expansion.

  • Rising Depreciation Pressure: CFO Anat Ashkenazi noted that depreciation growth will likely accelerate through 2025. In 1Q 2025, depreciation rose 31% YoY, up from 26% and 27% in the prior two quarters, driven by increased investment in technical infrastructure. While Amazon and Microsoft also face rising depreciation, Alphabet is more exposed to margin deterioration, given Google Cloud’s relatively lower operating margins.

  • Search Disruption from Generative AI: The rise of generative AI tools — including ChatGPT, DeepSeek, Grok, and Anthropic’s Claude — is gradually eroding Google’s dominance in search. From a market perspective, Google’s competitive moat in search appears to be narrowing.

  • Ad Business Cyclicality: Advertising remains Alphabet’s core revenue driver and is highly sensitive to macroeconomic conditions. In the event of a recession, Google may be among the most vulnerable among the Magnificent 7, with 2H 2025 digital ad spending outlook clouded by economic uncertainty.

Technical Analysis:

  • Alphabet-A is currently trading between the 61.8% ($143) and 78.6% ($162) Fibonacci extension levels. The stock previously peaked at the 123.6% extension level of $207.32.

  • Key resistance levels to watch are: $162.04, $183.57, $207.32, $210.94, $222.01, $233.89, and $245.76.

  • Key support levels include: $145.13, $133.26, $121.38, $106.69, and $82.94.

  • It appears likely that Alphabet-A has found an interim bottom and is resuming its upward trajectory.

Past Price Performance:

  • Over the past 10 years, Alphabet-A has delivered an annualised return of 19%, lagging behind its Magnificent Seven peers — including Nvidia (69%), Tesla (34%), Microsoft (25%), Amazon (24%), Apple (22%), and Meta (21%).

  • However, Alphabet-A has exhibited one of the lowest maximum drawdowns and standard deviations among the group, reflecting more stable and less volatile performance over the long term.

Source: Tiger Brokers, Bloomberg, 1 May 2025Source: Tiger Brokers, Bloomberg, 1 May 2025

Conclusion:

  • Alphabet-A declined as much as 29.89% from its all-time high on April 8, and is still trading 23.05% below that peak.

  • The current 23% drawdown may be excessive considering Alphabet’s solid 1Q 2025 earnings. However, the market remains forward-looking, and the stock has been penalized due to ongoing economic and tariff uncertainties.

  • Despite near-term headwinds, Alphabet remains one of my top picks among the Magnificent Seven, offering exposure to both the digital advertising sector and long-term AI-driven growth.

  • Valuation is attractive: Alphabet trades at a forward PE of 19x, making it the cheapest among the Magnificent Seven — compared to Nvidia (37x), Meta (21x), Amazon (32x), Apple (30x), Tesla (139x), and Microsoft (30x).

  • Bloomberg’s analyst consensus shows a 12-month target price of $203.42, representing an upside potential of 28.1% relative to yesterday's closing price of $158.8.

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Comments

  • BonnieHoyle
    05-05
    BonnieHoyle
    It's great to see the potential in Alphabet
  • MoiraHorace
    05-05
    MoiraHorace
    Great analysis
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