AI Powered Cloud Advances Will Expand Digital Ecosystems

Key Takeaways

• Explosive growth in AI adoption, paid AI subscriptions, and expansion in emerging markets can significantly boost recurring revenue, margins, and long-term user growth.
  
• Investments in proprietary infrastructure and consumer AI hardware position Alphabet for leadership in digitalization, cloud transformation, and new monetization streams beyond advertising.
  
• Alphabet faces regulatory, market, and competitive pressures that threaten ad revenue growth, search dominance, and profitability, while unprofitable side ventures risk further strain on earnings.

Catalysts

Offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America.

• Analyst consensus highlights AI as a growth driver, but the magnitude is likely understated given the rapid doubling in token processing within months and near-vertical usage growth for core AI products-indicating Alphabet could see a step-function increase in both revenue and operating margin as AI becomes deeply embedded across all products by 2026.
  
• While analysts broadly approve of Alphabet's subscription and YouTube scaling, they may be missing how the explosive growth in paid AI subscriptions (notably Gemini Pro and Ultra) could create a path to multi-hundred-million subscriber platforms, materially boosting recurring revenue, smoothing earnings, and delivering higher overall margins than ad-based models alone.
  
• The current financials do not fully capture Alphabet's unique leverage from global expansion in emerging markets, where rising smartphone adoption and internet penetration, combined with localized AI-powered Search, YouTube, and productivity tools, can drive exponential ARPU and user base growth over the next decade, outpacing developed market growth rates and lifting long-term revenue trajectories.
  
• Massive, ongoing investment in proprietary infrastructure-such as the industry's largest fleet of AI-optimized data centers and custom accelerators-positions Alphabet to act as the indispensable backbone for the world's accelerated digitalization and enterprise cloud-AI transformation, supporting sustained, high-double-digit cloud revenue growth and driving operating leverage beyond current projections.
  
• Alphabet is uniquely positioned to commercialize new consumer hardware categories-such as next-generation AI glasses and multimodal devices-by leveraging advances in AI models, real-world data, and software integration, unlocking entirely new high-margin monetization surfaces and meaningful incremental revenue streams outside of legacy ad and cloud businesses.

Alphabet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Alphabet compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Alphabet's revenue will grow by 13.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 31.1% today to 29.2% in 3 years time.
• The bullish analysts expect earnings to reach $159.6 billion (and earnings per share of $13.98) by about September 2028, up from $115.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.1x on those 2028 earnings, up from 24.6x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

Alphabet Future Earnings Per Share Growth

Risks

• Alphabet's dependence on data for ad targeting faces mounting threats from global regulatory pressures, intensifying privacy demands, and potential digital taxation, which together could slow the company's top-line revenue growth and diminish net income from its core businesses.
  
• The growth momentum in Alphabet's advertising platforms is increasingly at risk as hardware commoditization, stagnant global smartphone penetration, and secular shifts in digital ad spend toward retail media, e-commerce, and social channels erode the expansion opportunities and may further decelerate revenue growth over the long term.
  
• Rapid advances from AI-native competitors and the prevalence of generative AI search tools threaten Google's historical dominance in search, raising the possibility of future market share declines and the erosion of both revenue and profit margins, especially as users adopt new models of online information retrieval.
  
• Rising traffic acquisition costs, particularly due to greater reliance on partnerships with device manufacturers and platforms, may compress Alphabet's net margins over time as these costs outpace improvements in monetization from new ad formats and AI-powered services.
  
• Alphabet's continued large-scale investment in non-core "Other Bets" such as Waymo, which remain unprofitable and exhibit slow commercialization, risks being a persistent drag on consolidated earnings and could lead to wider GAAP net losses if these business lines fail to scale or deliver material revenue contribution.

Valuation

• The assumed bullish price target for Alphabet is $283.83, which represents two standard deviations above the consensus price target of $228.86. This valuation is based on what can be assumed as the expectations of Alphabet's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $166.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $547.1 billion, earnings will come to $159.6 billion, and it would be trading on a PE ratio of 26.1x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $235.0, the bullish analyst price target of $283.83 is 17.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.