On Feb. 4, Alphabet (GOOG 0.20%) (GOOGL 0.41%) reported mixed performance in the 2024 fourth quarter. Revenue was up 12% year over year to $96.5 billion, lower than the Wall Street target of $96.67 billion. Earnings per share (EPS) rose 31% to $2.15, barely beating analysts' consensus estimate of $2.13.
Investors were mainly disappointed with Google Cloud's top line as revenue of $12 billion fell short of the consensus estimates of $12.2 billion. The market has also raised concerns about the future of Alphabet's free cash flows and margins in the face of aggressive plans for capital expenditures (capex) of $75 billion in 2025, a dramatic increase from $52.5 billion in 2024.
Not surprisingly, shares are down more than 9% since the earnings release.
NASDAQ: GOOG
Key Data Points
The stock has also been hurt by Chinese start-up DeepSeek's claims of developing a large language model with capabilities comparable to OpenAI's GPT4 at significantly lower costs. With the market questioning the huge level of AI spending, investors are also concerned about the monetization prospects of Alphabet's chatbot Gemini.
Although these challenges cannot be ignored, the business' fundamentals and financials are still strong. The company generated free cash flow of $72.8 billion and returned $70 billion to shareholders in 2024. Here are some other key reasons it can be a smart pick in 2025.
Its robust AI strategy
Alphabet has been at the forefront of the ongoing AI revolution with its multifaceted strategy. The company unveiled its most capable AI model, Gemini 2.0, in December 2024, mainly to target the rapidly expanding agentic AI market. The company has also released the workhorse Gemini 2.0 Flash model focused on faster movement of data and enhanced performance for developers and customers.
And it has been aggressively infusing AI features across all of its seven key products and platforms -- such as search, advertising, and the cloud -- to increase usage and expand possible functions for its AI.
The adoption of this technology has been a major growth catalyst for its cloud business, whose customers are using computing capacity over eight times more for AI training and inferencing compared to 18 months ago. And management has been working on leveraging AI capabilities to optimize efficiency across its entire technology stack, which includes hardware, software models, and products.
With Alphabet gearing up to spend $75 billion in capex mainly on technical infrastructure, including data centers and servers, the company may see much faster growth for the now capacity-constrained Google Cloud. Margins may also improve, as management prioritizes AI technologies that enable cost efficiencies.
A strong search and advertising model
Alphabet's core business continues to impress despite rising competition from AI players. Google Search revenue was up 12.5% year over year to $54 billion, while YouTube advertising sales jumped 14% to $10.5 billion in the fourth quarter.
Google Search has demonstrated exceptional strength in financial services (insurance) and retail verticals (especially during the holiday shopping season). The integration of Gemini-powered AI Overviews in search across more than 100 countries has also been a key in driving up usage and user satisfaction for Google Search.
This effect is especially pronounced with younger users who are learning to ask new questions and are impressed with AI Overviews' efficiency and speed. Alphabet has also made Circle to Search (touch-screen enabled search functions) available on more than 200 million Android devices -- further driving mobile use of Google Search.
Each day, YouTube content was streamed for over 1 billion hours globally on televisions in 2024, making it the leading streaming service in the U.S. based on viewing time. YouTube has been successful with its short-form videos and podcasts. Connected television accounted for almost 15% of Shorts viewing in the U.S. at the end of 2024.
Its valuation
Alphabet shares are trading at nearly 23 times forward earnings, which is reasonable considering the S&P 500's forward price-to-earnings ratio (P/E) of 22.5. Several other reasons show the potential for improvement in the company's valuation multiples in the coming months.
Analysts expect revenue and adjusted earnings per share to grow year over year by 11.4% and 11.8%, respectively, in fiscal 2025. Although those estimates may seem modest, they are impressive for a company of Alphabet's scale and geographic reach. The company generated nearly $100.2 billion in net income while its operating margin was a solid 32% in fiscal 2024. It also has a strong balance sheet with $96 billion in cash and marketable securities.
Google Cloud is the No. 3 player in the global cloud infrastructure services market, accounting for an 11% share in the fourth quarter of 2024. It demonstrated impressive growth in the quarter, despite capacity constraints. The core Search and YouTube businesses also reported robust growth.
Lastly, the company's autonomous driving division, Waymo, has also seen dramatic progress in 2024, by reaching a milestone of safe completion of more than 4 million passenger trips. The service is seeing increased adoption, with an average of over 150,000 trips every week.
The planned $75 billion capex for 2025 may seem concerning in the short run, but it could be a major growth catalyst in the long run. Hence, considering all these tailwinds, Alphabet seems like a compelling buy in 2025.
