Why Google (GOOGL) Leads The AI Pack
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When ChatGPT burst onto the scene in late 2023, Wall Street feared Alphabet/Google’s (GOOGL) core search business faced disruption from generative AI chatbots becoming the new gateway to information. These concerns sent the stock tumbling in early 2024. However, Q3 results have decisively put those fears to rest. Not only did Search revenue grow 12.0% year-over-year, but users are searching more frequently and asking increasingly complex questions. Google’s commitment to artificial intelligence has expanded what people can search for and how they search for it, driving additional queries rather than cannibalizing existing ones. Financial pros have taken notice, with Google leading all tech companies in search volume according to our TrackStar data, outpacing even Microsoft. But what’s most impressive isn’t the numbers – it’s how Google is translating its AI investments into real product innovation and monetization. Here’s our deep dive into why Google is positioned to lead in the AI era. Google’s Business From its founding as a search engine in 1998 to today’s AI-first company, Google has built an empire around organizing and making accessible the world’s information. The $339.9 billion revenue generator serves billions of users globally through its flagship products like Search, YouTube, Android, and Chrome, while rapidly expanding its enterprise cloud offerings powered by its advanced AI infrastructure.
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Google segments its business into the following areas:
The latest quarter, performances across segments demonstrated strong momentum. Search grew 12.0% year-over-year while Cloud surged 35.0%. DeepMind’s models now power everything from Search AI Overviews to YouTube recommendations, with AI Overviews reaching over a billion users monthly and driving increased engagement. Cloud customers are rapidly adopting these capabilities, with Gemini API calls growing 14x in six months. The company’s infrastructure investments, including custom TPU chips, have reduced AI query costs by 90.0% in 18 months while doubling model capabilities. Management’s roadmap for 2025 includes Project Astra, which aims to enable more sophisticated visual and reasoning capabilities. Additionally, Google’s strategic partnership with Apple remains crucial. While the default search arrangement faces DOJ scrutiny, it delivers significant value for both companies, cementing Google’s position as the premier search provider across all major platforms.
Financials
Source: Stock Analysis Google’s financial profile shows a company operating from a position of strength. Q3 Revenue grew 15.0% to $88.3 billion while operating income jumped 34.0% to $28.5 billion as margins expanded to 32.0%. Operating cash flow reached $30.7 billion despite a $3.0 billion EC fine payment. The balance sheet remains formidable, with $93.2 billion in cash, while free cash flow of $17.6 billion provides ample resources for both AI investments and shareholder returns through buybacks and dividends. This financial performance reflects continued cost discipline under new CFO Anat Ashkenazi while maintaining aggressive investment in innovation. Valuation
Source: Seeking Alpha Google trades at attractive multiples given its market position and growth profile. Its forward P/E of 21.3x and EV/EBITDA of 13.8x compare favorably to Meta (META) at 27.6x and 15.4x, respectively. The price-to-sales ratio of 6.4x sits well below Meta’s 10.1x. These discounts persist despite Google’s superior margin profile, with Meta trading at higher multiples despite lower gross margins (81.5% vs 57.6%) and similar returns on equity. A PEG ratio of 1.2x suggests the market undervalues Google’s AI advantages and future monetization potential. Growth
Source: Seeking Alpha Revenue growth of 13.4% year-over-year and a 3-year CAGR of 14.2% demonstrate consistent execution at scale. EBITDA growth of 34.6% and EPS growth of 47.6% reflect strong operating leverage. This growth spans all key segments, with Search and YouTube ads both up 12.0% and Cloud accelerating 35.0%. Forward growth expectations of 11.0% appear conservative given Google’s AI momentum and cloud trajectory. Profitability
Source: Seeking Alpha Google’s profitability metrics lead its peer group, with gross margins of 57.6% and operating margins expanding 450 basis points to 31.0%. EBITDA margins of 35.2% continue growing faster than revenue, while return on equity stands at 30.9%. This margin expansion during heavy AI investment highlights Google’s structural advantages. The company’s vertical integration from chips to applications provides sustainable competitive benefits.
Our Opinion 9/10 Google has emerged as the clear AI leader, successfully translating its early investments into tangible results. The company combines strong growth, expanding margins, reasonable valuation, and industry-leading profitability with robust cash generation and clear AI leadership. While regulatory risks persist around Search and Play Store, Google’s innovation engine continues accelerating. For investors seeking AI exposure with strong fundamentals at a reasonable price, Google remains a top choice, with its new dividend providing additional return potential. |
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