We came across a bullish thesis on Alphabet Inc. (GOOG) on Substack by Elliot. In this article, we will summarize the bulls’ thesis on GOOG. Alphabet Inc. (GOOG)’s share was trading at $162.42 as of April 28th. GOOG’s trailing and forward P/E were 18.13 and 18.05 respectively according to Yahoo Finance.
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Alphabet (GOOG) delivered a strong Q1 performance, with revenue growing 14% year-over-year in constant currency, GAAP profits rising 20%, and margins coming in ahead of expectations. Almost every major segment reported healthy growth, and despite market fears about AI disrupting its core search business, there’s little evidence of structural erosion. Yet the stock barely moved. The muted reaction stems from Google’s cautionary tone on Q2, highlighting macroeconomic uncertainty and the impact of the end of the de minimis rule, which affects low-cost, cross-border direct-to-consumer (D2C) imports from Asia. On top of that, the company’s ambitious $75 billion CapEx plan for 2025—mainly for AI data centers and compute—has raised concerns about future depreciation and pressure on GAAP margins. Nonetheless, stripping out these short-term issues reveals a company growing steadily at 10–12% annually with GAAP margins north of 33%, underpinned by a dominant and defensible search franchise. Trading at just a modest multiple of 2026 earnings, Alphabet looks cheap—especially if you believe it retains its core economics and can normalize CapEx growth over time.
Search remains the foundation of Google’s business, and Q1 results showed no material signs of disruption. Revenue grew 10% year-over-year, largely due to pricing rather than volume, suggesting monetization remains strong even as demand softens. Paid click growth was just 2%, but average CPC rose, and Google noted AI Overviews are now reaching 1.5 billion users per month with monetization roughly in line with traditional results. The company is also experimenting with “AI Mode” in search—handling multi-step, more complex queries—which could expand monetization surfaces. Visual and multimodal search is another emerging moat, with features like Circle to Search now on 250 million devices and seeing 40% sequential usage growth. Lens is also gaining traction. Meanwhile, the slow fade of Google’s Network business, which has now declined for 11 consecutive quarters, is quietly helping margins by reducing TAC-heavy, low-margin ad revenue. As a result, Services margins hit a record 42.3% this quarter. Altogether, the bear case that generative AI will cannibalize search remains speculative. If this disruption thesis doesn’t materialize in the near term, Alphabet’s valuation becomes increasingly difficult to justify at current levels.
YouTube also posted strong numbers, with ad revenue up 10% and Shorts engagement growing 20% quarter-over-quarter. In a key development, YouTube’s subscription business—which includes Music and Premium—hit 125 million global subscribers and helped drive Alphabet’s total subscriptions to 270 million. This business, now reported under the Subscriptions, Platforms & Devices segment, grew 19% and surpassed YouTube ads in revenue for the first time. Back in Q1 2022, the two segments were roughly equal, but subscriptions have since pulled ahead, highlighting the growing importance of recurring, high-margin revenue. If Google continues integrating AI-powered features into these bundles—like personal assistants, productivity tools, or enhanced search—the potential for price increases and margin expansion becomes real. YouTube also remains uniquely positioned across content formats, from short and long-form video to live, podcast, and music, all supported by its broader ecosystem. Shorts monetization is still ramping, and the company is moving further into branded reservation ad formats, signaling that growth here is far from over.
Google Cloud remains one of Alphabet’s most underappreciated assets. The business just crossed a $50 billion annual run rate, growing nearly 30% with operating margins reaching 18%, a major leap from low single digits just a year ago. In a fiercely competitive hyperscaler market, this is impressive. Google is leaning into its strengths—AI infrastructure, open-source tooling, and hybrid deployments—with offerings like Vertex AI, Sovereign Cloud, and Distributed Cloud. The company’s custom TPUs (now in Gen 7, known as Ironwood) offer 10x performance and 2x power efficiency, giving Google a real cost advantage for AI inference workloads. This infrastructure stack positions Google Cloud to be a core monetization platform not only for enterprise customers but also for Alphabet’s entire AI strategy. If Google can continue building capacity and locking in AI workloads, this segment could see significant operating leverage.
On the AI front, Q1 marked a turning point. Gemini 2.5 is now embedded across major Google products—Search, YouTube, Android, and Workspace—with over 500 million users experiencing AI-enhanced functionality. The pace of product development has accelerated, with tools like Gemini Live, Circle to Search, and AI agents receiving strong early feedback. Internally, Gemini is already driving real productivity gains: over 30% of code commits at Google now involve AI suggestions, up from 25% just a few months ago. This internal leverage extends beyond engineering to customer service, finance, and legal functions, representing a structural tailwind to margins. Unlike many competitors, Google is uniquely positioned to benefit from AI not just as a revenue opportunity but as an efficiency engine that helps offset growing costs.
The only real investor hang-up is CapEx. Google spent $17 billion in Q1 and reaffirmed its $75 billion guidance for the year, up over 40% from 2024. This aggressive investment—primarily in AI infrastructure—will materially boost depreciation, which is already up 31% year-over-year and expected to accelerate throughout 2025. That pressure on GAAP margins is unavoidable in the near term, but it’s tied directly to long-term competitive positioning in AI. If Google continues to extract productivity and revenue from this spend, it will prove durable. In the meantime, with a resilient core business, strong margin profile, and underappreciated subscription and cloud engines, Alphabet represents a compelling investment with asymmetric upside once the AI monetization story becomes fully priced in.
Alphabet Inc. (GOOG) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 174 hedge fund portfolios held GOOG at the end of the fourth quarter which was 160 in the previous quarter. While we acknowledge the risk and potential of GOOG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GOOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.