MichaelP updated the narrative for GOOGL

Generative AI is in fact, sustaining - Google I/O 2025

From early discussions in 2023 about how Alphabet's core business was going to be disrupted by ChatGPT, Alphabet has shown over the last 2 years that it can rise to the challenge and adapt.

I won't repeat what was covered at the Google I/O 2025 conference the other day, or the Q1 2025 earnings report, but if you don't want to watch the Google I/O 2025 event, check out The Verge's 32 minute summary here:

https://www.youtube.com/watch?v=bDVpI23q8Zg&ab_channel=TheVerge

And you can find its Q1 2025 earnings results slides here:

https://abc.xyz/assets/0d/82/1464241c40ca89c5981759fc541c/2025q1-alphabet-earnings-slides.pdf

As for how both of these impact my narrative on Alphabet, here are a few of my thoughts:

1. The recent fear around Google Search being dethroned (as Apple's Safari possibly opens up to alternatives, and people use ChatGPT instead of search) seems to be a bit overblown from my point of view.
   1. While the search business is still performing well, it appears to be evolving and adapting to the changing landscape with reportedly less cannibalisation than I expected from AI overviews. While search is no doubt a legacy business, there are still industry tailwinds and they're heavily integrating Gemini, making it's output to users more useful. While it no doubt needs refinement, it's continually getting easier to ask Google search anything, and get a useful answer with AI overview.
   2. While I find it hard to validate, Sundar Pichai and the CBO, Philipp Schindler alluded to the fact that they're seeing roughly the same monetisation as with traditional search and that they're "happy with what they're seeing". While that may be true, I think Ads within AI overviews are so far incredibly rare(?), or if thy are present, they're a tiny fraction of what's shown at the moment(?). Not sure. So it remains to be seen if this is still the case as AI overviews (and ads within them), get rolled out more broadly. Something I'll need to continue watching.
2. My catalyst for "Generative AI to be sustaining, not disruptive" seems to be playing out. From watching the I/O event, it appears that Generative AI has exponentially increased the value that Google can provide to users all across it's ecosystem of offerings.
   1. The company mentioned that it's Gemini app, a direct competitor to OpenAI's ChatGPT, has 400m MAU, while recent court filings indicate that ChatGPT has roughly 600m MAU. With their pricing plans for Google AI Pro ($20 USD/month) and Google AI Ultra ($250 USD/month), I expect to see additional revenue earned from these offerings as it's large user base slowly starts taking up these offerings. By the way, can one of the big tech names please create a product that isn't named pro, max or ultra? Cheers.
   2. A promising sign of the cloud business continuing to do well is evident in it's revenue (up 28% YoY) and margins (now 17.8%, up from 9.4% the prior year, and close to breakeven when I originally wrote the narrative). The trends here in both revenue and earnings are faster than my original estimates, which is great, and proof that this segment is moving in the right direction.
3. We're also slowly seeing Alphabet's reliance on Google Services revenue reduce over time. In 2017, Google services revenue accounted for 99% of total revenue, and today, in 2025, it accounts for 86%.
   1. That's not even because Services revenue has reduced, it's simply because annual Google Cloud revenue has grown much faster, from $5bn in revenue in 2017, to $45bn LTM in the latest report.
4. The company has a lot of operating leverage, and it's cost cutting initiatives have helped it's overall net profit margins from around 21% when I originally started this narrative, to now 30.9% as of Q1 2025 quarter.
   1. My original estimates were for 25% net margins by 2029, but the fact that it has reached 30% already shows I was too conservative. Reviewing the narrative, I don't believe there is a high probability of anything huge that will lead to a large enough decrease in revenue or increase in costs to send margins back down to 25% by 2029. For that reason, I'm going to update my valuation by increasing my profit margin estimates by a 5 percentage points to 30%.
5. This increase my fair value estimate to $212 in 2030, up from $189 in 2029.

Overall, I'd summarise by saying that Google's dominance doesn't appear to be fading as much as many fear, digital advertising trends and cloud computing trends appear to still be a tailwind, Google has integrated and leveraged Generative AI into it's entire ecosystem (and monetised appropriately), and cost cutting initiatives and operational efficiency was even better than I expected, hence the upgrade in future profit margin estimates.

For now, Alphabet appears to be doing well and still have solid prospects ahead.