Alphabet (GOOG 0.52%) (GOOGL 0.36%) is currently out of favor with the market. Investors are concerned about the impact of generative AI technologies on Alphabet's core business, as evidenced by the decline in its stock.
However, I think there's an under-the-radar reason that Alphabet's stock could soar in the second half of 2025, and investors would be wise to get in on it now before the stock really takes off.
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Google Search is under scrutiny by investors
Alphabet's biggest business segment is the Google Search engine. This legacy business built Alphabet into the company it is today, and allowed it to fund all of the various business opportunities Alphabet has taken over the past decade.
The market is fearful that Google Search will quickly go away as more people start using generative AI models. This would take a significant bite out of Alphabet's largest revenue stream and cause the stock to tumble.
However, investors are forgetting that there's a large portion of the population that will likely stay Google users out of habit. Additionally, Google implemented AI search overviews, which integrate generative AI seamlessly with search, and that integration is likely enough AI for the vast majority of the population.
We'll hear more from Alphabet about the Google Search engine's health during its Q2 earnings report on July 23, but until then, we'll have to look at Q1's results. In Q1, the Google Search engine grew revenue by 10% year over year. That's not indicative of a business unit that's failing, yet that is what the market is convinced of. This growth rate will be scrutinized during Q2's results, but if it comes in at the same low-double-digit growth rate, the stock could be primed for more upside.
But there's another business segment that I think investors are forgetting about that could hold the key to Alphabet's future.
Google Cloud is a key segment within Alphabet
Alphabet's most intriguing business unit in my eyes is Google Cloud. The cloud computing industry is seeing a massive boom as it's benefiting from two tailwinds. First, new AI workloads are being spun up daily, and Google Cloud has become a top option to run those on, particularly because of its in-house model, Gemini, which scores among the best. Second, businesses are migrating general workloads, like website hosting and business data, onto the cloud as on-premise equipment ages out. Both of these factors are huge growth drivers for the broader cloud computing industry, and with Google Cloud's third-place position, it's in an excellent spot to capture some more business.
In Q1, Google Cloud's revenue rose 28% year over year, and it produced an operating margin of 18%. It has a long way to go before catching Amazon Web Services as the industry-leading cloud provider (it posts operating margins of around 40%), but that underscores how much upside this division provides Alphabet.
While most of the market will be focused on Google Search's growth during Q2's results, which I will be too, don't forget to check Google Cloud's growth.
Alphabet needs both of these segments to perform well to keep the market from turning more bearish on the stock. I think it can do that, and it could be what the stock needs to turn its fortunes around for the rest of 2025.
