Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
AlphabetGOOGL/GOOG kicked off 2025 with a set of solid results, with the firm’s sales and operating margins growing 12% and 230 basis points year over year, respectively. Google Cloud continues to be the firm’s growth engine, growing 28% year over year.
Why it matters: Despite the turbulent macroenvironment as well as ongoing antitrust cases and tough competition in generative AI, we were impressed by Alphabet’s continued strong execution, with the firm showing clear progress on the generative AI monetization front.
In particular, we were impressed with the wide range of monetization angles the firm is creating by leveraging AI, including Google Cloud, Gemini, AI Overviews, and improved ad targeting tools provided to advertisers.Beyond advertising, the firm’s public cloud business remains supply-constrained, leading to the deceleration in growth to 28% from 30% in the previous quarter. We expect Google Cloud growth to reaccelerate as additional capacity comes online in the second half of 2025.
The bottom line: We maintain our $237 per share fair value estimate for wide-moat Alphabet and continue to view the stock as materially undervalued even after shares climbed 5% after hours.
While we believe investor concerns around a tariff-induced digital ad spending slowdown and antitrust-related impact on Alphabet’s business are valid, we think the selloff in the firm’s shares has been overly punitive, creating an attractive buying opportunity.We reiterate our view that Alphabet will be able to navigate the antitrust cases against it without material value destruction in its businesses. Also, we expect the firm’s diversified end-market and geographic exposure to insulate its ad business from a sharp decline in ad spending.
Coming up: Despite the ongoing macroeconomic uncertainty, Alphabet restated its intention to spend $75 billion in capital expenditure in 2025. We believe the firm has a lucrative long-term opportunity in generative AI and view these investments as sound.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
