Google

iNVESTMENT ANALYSIS

Analyst: Gatto Paolo

Reviewer: B. Tommaso

Current Price: $167.62

Ticker: GOOG

CEO: Sundar Pichai

Date: 16/03/2025

Sector: Tech Services

Industry: Internet Software and Services

Target Price: $219.9

Possible Upside: 31.2%

Opinion: Undervalued

THE GRAPH

Business Overview

Alphabet, Inc is a holding company, which engages in the business of acquisition and operation of different companies.

It operates through three specific segments: Google Services, Google Cloud, and Other Bets segments.

Google Services: Ads Revenue, Android, Chrome, Hardware, Google Cloud, Google Maps, Google Play, Search, and YouTube.
Google Cloud: infrastructure and platform services, collaboration tools, and other services for enterprise customers (i.e. Compute Engine, Cloud Storage, Cloud Run, Vertex AI, Gemini per Google Cloud)
Other Bets: its a segment dedicated to Google’s bets. It consists of ventures such as Access, Calico, CapitalG, GV, Verily, Waymo, and X.

Google Services accounts for nearly 87% of total revenues in 2024, with Google Cloud accounting for 12.3% and Other Bets accounting for 0.47%.

Below, you will the segmentation as reported in the 10-K:

sEGMENT ANALYSIS

Google Services

Google Search (56.5% of Tot. Sales in 2024): CAGR 3 yrs – (6.76%). The YoY growth of the revenue stream is 13.15%
Youtube Ads (10.3% of Tot. Sales in 2024): CAGR 3 yrs – (7.2%). The YoY growth of the revenue stream is 14.7%
Google Network (9% of Tot. Sales in 2024): the revenue stream has been slowing down since 2022, with a % loss YoY of -3.04%.

Google Advertising Revenues has a 3 yrs CAGR of 5.63%. The revenue stream with the most significant growth is Youtube Ads.

Google subscriptions, platforms, and devices (11.5% of Tot. Sales in 2024): CAGR 3 yrs – (11.59%). The YoY growth of the revenue stream is 16.2%

In this revenue line are: YouTube Premium & YouTube Music, Google Tv, Google One/Play, Google Play Store, Android Platform Fees, and all the devices produced by Google (smartphones, earbuds, wearables, Chromecast, and more)

GOOGLE CLOUD

Google Cloud (nearly 12.3% in 2024): CAGR 3 yrs – (17.8%). It is the fastest growing segment as of 2024

Google Cloud’s revenue segment primarily comes from Google Cloud Platform (GCP) and Google Workspace.

Other bets

Other Bets (0.47% in 2024): CAGR 3 yrs – 15.3%. The YoY growth of the revenue stream is 7.9%.

The other bets segment biggest ventures are: Waymo, DeepMind, Verily, Google Fiber, CapitalG, Calico, Intrinsic, and a lot more.

Market Share

Google’s operations are highly diversified, and due to this diversification, it’s quite difficult to assess its overall market share. In this case, the market share analysis will focus on specific sub-sectors in which Google operates and competes.

However, prior to the Market Share assessment, I would like to present a few graphs. These graphs illustrate the future growth and potential of several segments in which Google operates and maintains a dominant presence.

gOOGLE sERVICES

There is not much to be said regarding Google Search. For the last 20+ years, every human on the planet has known that if you need to search something, you Google It.

The graphs below clearly shows why:

Then we have YouTube. I utilize YouTube daily, often several times throughout the day, perhaps excessively; however, I genuinely believe it represents the finest social media platform in existence.

The notable distinction between YouTube and other social media platforms such as Facebook, Instagram, and TikTok lies in the audience’s expectations. Millions of individuals engage with the platform not solely for entertainment, but also to acquire knowledge, enhance their abilities, and develop their skills, in contrast to the usage patterns observed on other social media platforms.

These are its numbers:

Google Cloud

Then, we should move to one of the most promising segments of Google, Google Cloud. It consists of the Google Cloud Platform and Google Workspace.

Cloud computing has been a hot topic, especially in the past two years thanks to the AI expansion (and related CAPEX). Google Cloud is the third biggest provider of cloud computing services, behind Amazon’s AWS and Microsoft Azure (with AWS as market leader). The market can be divided in various sub-segments, as the services offered vary depending on the consumer and necessities.

We have 4 main types of Cloud deployment (even if other sources cite just 3 types) (GC, 2024):

Public Cloud – Shared infrastructure managed by a cloud provider (AWS, GCP, Azure).
Private Cloud – Dedicated cloud resources for one organization (on-premises or hosted).
Hybrid Cloud – Combination of public + private cloud for flexibility.
Multi-Cloud – Using multiple cloud providers to reduce reliance on one.

Below, you will see a couple of graphs on Google Cloud and its market positioning:

Google offers Public, Private, and Hybrid Cloud services. In the Public Cloud segment, it lags behind AWS and Azure. In terms of revenues, Google Cloud’s numbers are 1/5 of AWS revenues and 1/3 of Azure revenues (but it matches the cloud revenues of Alibaba).

In terms of revenue growth, Google Cloud has a 3-year CAGR of 17.8% (and a lot of room to grow). AWS revenues have a 3-year CAGR of 15.5%, and Azure revenues have a 3-year CAGR of 18.9%.

I think that Google’s position (as of market share) will likely increase in the future, but it won’t be the primary cloud provider. Amazon has cemented its position in a way that is difficult to challenge (as Microsoft did). Changing cloud providers is difficult, and once you decide on a provider, it will be challenging to move to another one (high switching cost). However, I know that the cloud market will significantly increase in the coming years, as the amount of data produced will certainly rise.

If Google spends and innovates as it did in the past, I see a lot of room for organic growth in this segment.

Financials

Balance SHeet

ASSET OVERVIEW

Cash & Marketable Securities: Declining YoY (-13%)

Alphabet’s cash and MS declined, likely due to stock buybacks ($15.55 billion in Q4).
A reduction in cash suggests the company is prioritizing capital returns and reinvestments over liquidity preservation.

Accounts Receivable – Growing Faster Than Accounts Payable

Indicates that Google is extending more credit to customers than it receives from suppliers.
This could mean higher contractual revenue agreements or a shift toward subscription-based revenue (Google Cloud, YouTube Premium).
Potential risk: If receivables grow too fast, it could signal weaker cash collection cycles.

Inventory – Minimal Due to Outsourcing Model

Unlike traditional hardware companies, Alphabet does not hold significant inventory.
Google outsources the manufacturing of its Pixel smartphones, Nest devices, and custom chips.
This approach minimizes warehousing costs and supply chain complexities.

Leasing Strategy – $13 Billion in Leases

Alphabet leases infrastructure, office spaces, and data center equipment rather than buying outright.
This is a capital-efficient approach that allows for flexibility in expansion.
Key question: What is the weighted average lease rate? I could’t find it, it is probably somewhere in the 10-K.

Long-Term Investments – Over $35 Billion in Non-Marketable Securities

These investments likely include private company stakes, venture capital investments (GV, CapitalG), and other alternative assets.
The company with the biggest potential is Waymo. Google has spent $1.1 billion on the project (Waymo came out of Google X labs), and in 2024, Waymo has raised $5.6 billion in funding. In the latest funding roun, Waymo was valued at nearly $45 billion, but other push its intrinsic value at more than $250 billion dollars (looking at TAM penetration)
Waymo has grown the number of weekly paid rides from 10,000 to over 100,000 in the last 12 months. It went from 50,000 weekly rides to 100,000 just in the last six months.

Property, Plant & Equipment (PP&E) – $180+ Billions, 5-Yr CAGR 16%

Alphabet has been aggressively expanding infrastructure, investing in:

Data centers for cloud computing & AI.
Office spaces to support a growing workforce.
Network equipment & AI chips (TPUs, GPUs for AI/ML models).

The strong PP&E growth aligns with Google’s Cloud and AI-driven strategy.

Goodwill – $32 Billion (advice: read Damodaran’s view of Goodwill)

Liability overview

Accounts Payable – Growing, but at a Slower Pace Than Receivables

Suggests looser payment terms for customers but stricter supplier agreements.
Potential cash flow challenge if this gap widens significantly.

Debt – Relatively Low Compared to Cash Flow

ST debt: $4.12 billion
LT debt: $24 billions
Net Debt: -$67.52 billions

Alphabet has historically maintained low debt levels, relying more on internal cash flows. Debt levels remain manageable, considering strong FCF generation.

Deferred Revenue – Likely Growing Due to Subscription Models

Equity

Alphabet’s equity base is heavily driven by retained earnings, as the company has historically reinvested profits instead of paying dividends.

Retained earnings have grown significantly, reflecting: 1) High free cash flow (FCF) generation from core businesses (Search, YouTube, Cloud); 2) Strategic reinvestments in AI, cloud computing, and infrastructure (PP&E growth).

Alphabet repurchased $15.55 billion in stock in Q4, reducing outstanding shares.

Alphabet announced $70 billion in share repurchases in April 2022

I like this repurchase plan, as I think that Google stock is undervalued, however, I still think that money spent on growth CAPEX is always better (especially in periods of high multiples – not now).

In the end, Alphabet’s equity structure prioritizes reinvestment and buybacks over cash accumulation, and the company’s financial strength allows for aggressive investments.

Income Statement

Revenue Breakdown & Growth Drivers

Alphabet’s revenue is dominated by Google Services, with growth coming from:

Google Search & Ads – Core business, stable high-margin cash cow.
YouTube Ads & Premium – Benefiting from digital ad growth & subscriptions.
Google Cloud – Expanding as enterprises adopt AI & cloud solutions.
Other Bets – Minimal impact but potential long-term optionality.

We have already analyzed the past and future prospects of each revenues stream, but key trends that could be further evaluated:

Subscription-based revenue (YouTube Premium, Google One) is increasing, improving earnings stability.
Cloud revenue is growing faster than Ads, signaling a diversification push.

Possible Issue: Alphabet’s revenue is still ad-heavy (nearly 56% of total sales), but the shift toward cloud & subscriptions provides resilience against advertising downturns.

Cost of Revenue – Rising Due to Cloud & AI Investments

Traffic Acquisition Costs (TAC) – Payments to Apple & partners for search distribution.
Cloud infrastructure spending – Data centers, AI chips, and networking costs.
Content costs – YouTube creator payouts, Play Store revenue share.

Higher cost of revenue pressures gross margins, but long-term investments in cloud & AI should drive operating leverage.

Sales & Marketing (S&M) – Efficient Relative to Peers

Ad spending for YouTube, Pixel, and Google Cloud.
Sales teams for enterprise cloud solutions.

Alphabet benefits from organic traffic via Search, reducing reliance on paid marketing. Cloud marketing spend is rising as it competes with AWS & Azure (those $65 billions in CAPEX are going to push up Google’s market share?)

Profitability & Margins

Gross Margin – Under Pressure Due to AI & Cloud Costs

It lost nearly 1% QoQ (Q3 2024 was 58.67% – In Q4 2024 was 57.89%)
Search & Ads remain high-margin, but infrastructure-heavy businesses lower blended margins.

AI-driven margin compression is temporary—long-term monetization of AI & cloud should restore profitability. Google’s CEO said that DeepSeek breakthroughs (in cost to train the LLM) will further decrease the cost per query (a fundamental measure for Google).

Operating Margin – Still Strong, but AI Costs Weighing

32.09% in Q4 2024, down from Q3 2024 (32.30%)

Investors must accept short-term margin pressure in exchange for future AI & cloud profitability.

Net Income & EPS – Boosted by Buybacks

Alphabet maintains strong net income growth, driven by:

High-margin search & ads business.
Operational efficiency vs. peers.
Aggressive stock buybacks, boosting EPS.

Shareholder returns are enhanced by buybacks, but long-term EPS growth depends on AI & cloud execution.

CASH FLOW STATEMENT

cASH FLOW FROM OPERATING ACTIVITIES

OCF growth (19.8%) aligns with net income growth (19.9% CAGR): Alphabet is converting earnings into cash efficiently.

Stock Based Comp. is declining relative to revenue, improving earnings quality.
Working capital improvements (faster receivables collection, optimized payables).
Efficiency gains: OCF margin rose from 31% in 2019 to 38% in 2023, indicating stronger cash conversion

Alphabet generates substantial cash flow with expanding margins, allowing it to self-fund CAPEX and shareholder returns without relying too much on debt.

Cash from Investing Activities

CAPEX has increased consistently, reaching $33.1B in 2023 (14.95% of revenue). It’s projected to hit $75B in 2025 as Alphabet expands AI & cloud infrastructure.
M&A activity remains strategic but controlled, averaging ~$3B annually. Alphabet acquired over 20 companies in AI, cybersecurity, and cloud sectors since 2020.
Investment portfolio (marketable securities) is shifting from net purchases to net selling to optimize cash.

CAPEX, without a doubt, will be one of the biggest drivers of growth or value destruction in the next few years. CAPEX acceleration is necessary for AI & cloud dominance. Shareholders should monitor CAPEX ROI closely, as rising spending could pressure FCF margins.

CASH FROM FINANCING aCTIVITIES

Aggressive buybacks ($60B in 2023, CAGR +33%) → Alphabet is consistently reducing share count.
New dividend introduced in 2024 (0.36% yield, 7.46% payout ratio) → Marks a shift in capital return strategy.
Debt issuance remains minimal (debt-to-equity 0.08x) → Alphabet maintains ultra-low leverage.

Alphabet prioritizes buybacks & dividends (as other Big Techs are doing) while keeping debt low, benefiting long-term shareholders.

FREE CASH FLOW

The 5-year CAGR of Google’s FCF is 11.1%, even if it stagnated in the $60 billion territory between 2021 and 2023.

The FCF has increased by +214% QoQ driven by various factors (issuance of shares, lower CF from Investing Activities, and a positive WC). It increased by +4.7% YoY.
FCF per share: $13.24
FCF margin: 20.79% – down from last year (22.62%)
P/FCF: 27.89 – down from last year (31.93)

Alphabet remains a cash flow powerhouse, with strong FCF, undervaluation vs. peers, and increasing shareholder returns. However, AI-related CAPEX needs close monitoring to sustain long-term growth.

ratios, Multiples, and margins

Margins

Gross Margin: 58.2% – Avg 5 yrs (55%)
EBITDA margin: 36.45% – Avg 5 yrs (33.07%)
EBIT Margin: 32.62%
Net Margin: 28.6% – Avg 5 yrs (24.97%)
FCF Margin: 20.79%

Ratios

Liquidity:

EBIT/Interest Expense: 419.37
LT Debt/Equity: 6.94% – it has been going down in the past 5 years.
Quick Ratio: 1.66 – it has been going down (less cash more debt)
D/E: 0.09 – in the past 5 years, it has always been in the 0.1 territory.
D/FCF: 0.39 – lowest in 5 years

Profitability:

ROA: 16.74% – Avg 5 yrs (13.3%)
ROE: 32.91% – Avg 5 yrs (27%)
ROCE: 32.42 – Avg 5 yrs (26.67)
ROIC: 28.24 – Avg 5 yrs (22.86)
FCF/Yield: 3.93 (current) – Avg 5 yrs (3.88%)

Valuation:

P/E: 23.21 – Avg 5 yrs (24.16) – it is currently going down as the share price plummeted, as P/S and P/FCF
P/S: 6.64 – Avg 5 yrs (5.835) – The current P/S is 5.8
P/FCF: 27.89 – down from last year (31.93)

Multiples – EV

EV/EBITDA: 17.82 – AVERAGE (17.4)
EV/Sales: 6.5 – Avg 5 yrs (5.5)
EV/FCF: 12.78 – Avg 5 yrs (12.5)

Alphabet is trading slightly below its historical valuation metrics.

Valuation methods

DISCOUNTED CASH FLOW

Data:

WACC: 8.8% (Sourced by Bloomberg)
LTGR: 3%
Forecast Period: 7 years
EBITDA Multiple: 18x (average EBITDA for industry)
EBITDA in 2031: $192.857 billion
Net Debt: -69.961
Diluted Shares Outstanding: 13.313 billions

The output of the DCF is $254.17 for the Perpetuity Method and $221.04 for the EBITDA method.

The average price for the DCF is $237.6. Below, the Sensitivity Analysis:

Ultimately, to assess the right entry point for a possible buy, I have created a rudimentary “Margin of Safety” analyzer:

I used a highly conservative margin of safety of 30%. The DCF final output shows that Google (with the data I used), it is undervalued.

reverse dcf

After the DCF, I wanted to test the underlying growth assumptions at which Google is priced today. The reverse DCF output should “ represents the revenue growth rate that the market has priced into the share price of the company over the next five years” (Wall Street Prep, 2024).

The 7-year CAGR of Google’s Revenue is 14.33%, and after all the calculations, the model’s output was 14.2%.

It means that the market has priced the future growth of Google (for the next 7 years) at 14.2%. Is it too much? Maybe. I would say that it depends on the scenario that will unfold:

It will depend on the future return on invested capital.
It will depend on the massive amount of Capex that Google is going to deploy. It will need time to return profits, but the question is, what will be the return?

Trading Comps

As peers for Google, I have used: META, MSFT, AMZN. These companies all compete in multiple business and revenue sources (especially in cloud computing and ad revenues). Probably just 3 peers are not enough, but hopefully, the results are not too skewed.

Google margins may be outshined by Meta and MSFT, but in terms of multiples, Google seems undervalued compared to its peers. The implied share prices (EV/EBITDA and EV/Revenue) are:

The Trading Comparable average price for Google is $202.86

If we put together the average price for the Trading Comps and the DCF, the final target price for Google is going to be $219.93.

Our Opinion

My perspective on Google is unequivocal. I consider Google to be one of the most innovative and disruptive enterprises the world has ever encountered. Although I acknowledge a potential bias due to my extensive use of Google’s services, I foresee significant opportunities for growth in the future. While Google’s revenue growth across all segments remains robust, the market appears to have reacted negatively to the recent increase in capital expenditures, as well as the lower-than-expected revenue from data centers, which contributed to the recent decline in share price. Even if Google may not emerge as the leader in the data center and cloud computing sector, it is a company that effectively diversifies its revenue streams, as evidenced by its Other Bets segment, which, despite being a minor percentage of total sales, contributes to the creation of impactful products.

Probably, the future growth of Google will be boosted by further penetration in Emerging Markets (especially in Asia and Latin America) with the Google Service segment, high growth in data centers/cloud computing segments thanks to increased CAPEX and overall expansion of the TAM. Moreover, Waymo and Other Bets businesses will probably drive a lot of growth in the future (with also the possibility of being sold at a high profit).

In the end, I think that Google is an amazing company. My final opinion is BUY (as I think it is undervalued).