Massively Impressive, But Not Quite a Buy

All figures in US dollars. Alphabet reports in USD; the tear sheet shows earnings per share in cents (1,081 = $10.81).

Alphabet is the parent of Google. The overwhelming majority of revenue comes from Google Services — principally Search advertising, YouTube ads, and subscriptions/platforms/devices — with Google Cloud the fast-growing enterprise computing arm, and "Other Bets" the small, speculative ventures.

The investment case rests on the durability of Search advertising (the cash engine), the growth of Cloud (increasingly the segment justifying a higher multiple), and Alphabet's position in the AI race — where decades of Search data, the Gemini model family, and Android's mobile reach combine into a well-integrated ecosystem.

Looking at turnover, since FY 2021 the company has not seen dramatic shifts. FY 2022 saw an increase of 9.8%, FY 2023 was 8.7%, FY 2024 was 13.9%, and in FY 2025 they are starting to see uplift again at 15.1%. We have to put some of this in context: during the pandemic, FY 2021 saw a 41.2% increase in revenue. Across the period FY 2020 to FY 2025, revenue rose roughly 120% — approximately 24% a year on average.

Six-year financial history ($m unless stated)

Over these five years, shares in issue have decreased by nearly 10.5% — so the equity is now around a tenth more concentrated than it was, presumably through buybacks. The gross margin has consistently increased, from 53.6% in FY 2020 to 59.7% in FY 2025. That is pretty good for a relatively mature company. In FY 2025, they hit a pre-tax profit of $134.6 billion. The dividend is very low, at a yield of around 0.2% — what we have come to expect from these tech companies.

The capex is enormous — from $24.6 billion in FY 2021 to $91.4 billion in FY 2025, with FY 2026 guidance of $175–185 billion (raised toward $180–190 billion at Q1), more than double the FY 2025 figure. This goes toward AI compute for Google DeepMind, Google Cloud customer demand, and strategic investments. The coming years are likely to bring high levels of capital expenditure, but I expect pretty good figures from them as they optimise their systems — Google Search in particular should improve performance, revenue and targeting.

Capital expenditure history

Turning to the Q1 2026 release (29 April 2026): revenues increased 22% (19% in constant currency) to $109.9 billion — the 11th consecutive quarter of double-digit growth. Operating income increased 30% and operating margin expanded two percentage points to 36.1%. Net income increased 81%, and earnings per share increased 82% to $5.11 (flattered by a net gain of $37.7 billion in other income).

Q1 revenue breakdown — Q1 2026 vs Q1 2025

Google Search remains by far the largest revenue source at $60.4 billion, and crucially it accelerated to 19% growth — a direct rebuttal of the bear thesis that AI chatbots would erode Search. Management notes AI Overviews is monetising at a rate similar to traditional Search. Google Cloud at $20.0 billion (+63%) is now the segment justifying the higher multiple, with cloud backlog reported at $240 billion.

Balance sheet position (31 March 2026)

Net cash increased from $30.7 billion to $38.06 billion over the quarter. More notably, long-term debt rose sharply from $46.5 billion to $77.5 billion. That is slightly concerning — it's still well within the bounds of a company this size and not a major issue, but the speed of the increase is worth noting. They are clearly funding the capex partly through debt issuance ($31.1 billion of senior notes in the quarter).

For my valuation I started with the historic figures. The three-year average earnings-per-share growth has been about 33%, and the five-year average 29.8% — some really dramatic figures that seem very high to me, though roughly what the market expects. The bear case I am most conscious of is where Google Search is heading: the impact of AI shifting searches away from search engines and into AI-based systems. But these super-large tech companies have a knack of staying on top of these shifts.

I settled on a 31% growth rate — more in line with what they have managed over the last five years and even the last three. I considered a 15% valuation reduction for the AI/search disruption risk, but decided against any reduction; in fact, after reviewing the Q1 figures I added a 12% valuation uplift to reflect my expectation that they can significantly outperform in the short to medium term. I anticipate the company doing significantly well across both consumer and enterprise products. Gemini, while not leading the field, is very high up there; they have a major advantage from decades of Google Search data feeding their AI, and huge funding to push capital expenditure through. I gave it a slightly elevated 27% risk factor, because we don't know where AI is heading — but I expect Google to be right at the forefront.

VALUATION SNAPSHOT

With the 12% uplift applied to the formula valuation, my conclusion is a valuation of approximately $412.98 — a value opportunity of around +15%. Still not quite a buy for me. On the initial inputs (no uplift), the valuation was $368.73 — roughly fair value at about −2%. You don't need to move the dials far in the other direction either: simply assuming a higher growth rate would push the value opportunity higher still. We are in heady territory with AI and tech, but I can easily see how someone could justify investing in a company like Google.

• AI/Search disruption: The central bear case. Q1 rebutted it for now, but a structural shift of search behaviour into AI systems remains the key long-term risk to the cash engine.
• Capex scale: $175–185 billion of guided FY 2026 capital spending is enormous. If the AI returns don't materialise, it's a major drag on free cash flow.
• Rising debt: Long-term debt jumped from $46.5 billion to $77.5 billion in a single quarter. Manageable for a company this size, but the speed is worth watching.
• High growth assumption: A 31% growth rate is aggressive. The valuation depends on sustaining historic growth — any deceleration would erode the value opportunity quickly.
• Regulatory risk: Alphabet faces ongoing antitrust scrutiny in the US and EU that could constrain parts of the business.

• A wider value opportunity: A pullback in the share price — or sustained higher growth — that pushed the value opportunity meaningfully above +15% would tip this from Hold to Buy.
• Continued Search resilience: Further quarters of Search holding or accelerating would decisively kill the AI-disruption bear case and justify a higher multiple.
• Cloud margin expansion: Google Cloud turning its 63% growth into strong, expanding margins would add a powerful second profit engine.
• Evidence of capex payoff: Clear signs that the AI infrastructure spend is generating incremental, high-margin revenue would support the aggressive growth assumption.
• Gemini gaining ground: Gemini moving toward the front of the AI field would strengthen the long-term competitive position.