Hi YXI friends,

Why did GOOGL tank by 7% after earnings? Many fund managers will say “nobody knows” or “more sellers than buyers”. Good for them.

The short answer is twofold, and we actually start today’s article by addressing them first. You can read this very first section, be satisfied, and get on with the more interesting things of the day. Or even better (for me), share it with your friends and colleagues first, get their “oh nice” response, then get on with the day.

First, Alphabet’s reported sales figure was below the analyst estimates by just 0.2%. It doesn’t sound like a lot, but historically, when sales exceeded estimates by less than 2%, Alphabet’s next-day share price nearly always dropped.

Secondly, Google Cloud’s Q4, while at an impressive 30% YoY growth rate, actually decelerated from Q3, dragging down the overall revenue growth. At the same time, Alphabet plans to spend $75 billion in CapEx for 2025 into the weakening growth. It makes investors anxious about the return on capital and actual AI monetisation.

For those who are interested in the comprehensive analysis of the earnings, valuation, and price technicals, please read on!

Table of Contents

• 1. Growth Highlights

• 2. Profitability Margins

• 3. Share Buybacks

• 4. Valuation Is Reasonable

• 5. Technical Analysis

• 6. Rating: Overweight

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Growth Highlights

Alphabet’s Q4 2024 Revenue Breakdown

Alphabet is an interconnected conglomerate with many different business segments, across Search, Advertising, Cloud Services, Streaming, Mobile Hardware, Applications, and Self-driving Cars. The company’s current goal is to lead the AI arms race and fully integrate AI technologies across its Search, Cloud, and consumer products.

Google Search is by far the biggest revenue driver, contributing to 56% of Alphabet’s revenue. Google Cloud, Google Subscriptions, and YouTube ads are similar in their revenue share at 11-12% each. It should be noted that from Q3, YouTube ads have moved up by 1% in revenue share, while Google Cloud moved down by 1%. This is probably what investors do not want to see.

Quarterly Revenue

Alphabet’s quarterly revenue was $96.5 billion, reflecting a 12% increase from Q4 2023. This is quite a slow down from Q3’s 15%, and also slower than the Q4 of a year ago. The deceleration calls into question on the rate of AI monetisation by Alphabet amidst heavy CapEx spending, which we will get to later.

TTM Revenue

Alphabet’s trailing twelve-month (TTM) revenue reached $350 billion, +14% YoY. The strong past 3 quarters have kept the TTM revenue growth only 50bp slower than Q3.

Product & Service Performance YoY

Google Search & Other Ads revenue reached $54 billion, growing 13% YoY. This is an acceleration from Q3’s 12%. Alphabet attributes the growth in Search to the popularity of AI Overviews, Circle to Search, and ad bidding adjustments. AI Overviews are now in over 100 countries, while Circle to Search is available on more than 200 million Android devices.

Personally, I think Gemini is much poorer than ChatGPT in text-based conversations, but its image creation is superior.

YouTube Ads grew by 14% to $10.5 billion. This again is a nice acceleration from Q3’s 12%, thanks to higher engagement in Shorts (now 15% of TV watch time), election ad spend, and YouTube Shopping expansion.

Personally, I love YouTube as a source of entertainment and knowledge, and I am not surprised it is doing well. YouTube enjoys an unrivalled ecosystem of user generated long-form content. This complements the in-house production streaming giants of Netflix and Prime, while competing with Reels and TikTok on the short-form side.

Google Cloud hit $12 billion, up 30% YoY. Unfortunately, this was a large deceleration from Q3’s 35% growth, and the likely reason the stock was punished by investors after earnings.

In Q4, Cloud customers consumed 8x more compute power for AI than 18 months ago. Vertex AI (a unified AI development platform for building and using generative AI based on Gemini) usage increased 20x YoY, with 5x more customers.

Google Subscriptions, Platform, and Devices brought home $11.6 billion, up 8% YoY. This was another deceleration from Q3’s impressive 28% growth, despite the busy holiday season. Google One and YouTube Premium continued expanding, while there was limited growth in Pixel hardware. A trend we also see in Apple’s iPhone.

Other Bets revenue reached $400 million, which is actually 39% lower than a year ago. Waymo reported 150,000 weekly rides, in line with Q3. Waymo is looking to expand to Austin, Atlanta, and Miami, directly challenging Musk’s Cybercab plan by partnering with Uber. But high investment costs impacted its profitability.

Regional Performance

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