GOOGL: AI Platform Expansion And Cloud Demand Will Support Durable Performance Amid Competitive Pressures

Key Takeaways

• Accelerating AI adoption and innovation are driving increases in user engagement, search monetization, and sustained revenue growth across core businesses.
  
• Diversifying products and expanding globally, particularly in cloud services and subscriptions, are improving margins and strengthening long-term growth potential.
  
• Heavy infrastructure spending, reliance on ad revenue, legal pressures, unprofitable new ventures, and rising competition threaten Alphabet's future profitability and market position.

Catalysts

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

• Accelerating adoption of AI-powered features (such as AI Overviews, AI Mode, and Gemini 2.5) is increasing user engagement and commercial search query volume, positioning Alphabet to monetize a larger user base and expand advertising-driven revenue on a forward-looking basis.
  
• Surging demand for Google Cloud's AI infrastructure and services, evidenced by record multi-billion dollar deals, a 38% YoY increase in backlog, and ongoing capacity expansion, suggests continued revenue growth and margin improvement as scale efficiencies are realized.
  
• Rapid growth in YouTube Shorts and expanding YouTube subscription offerings are diversifying revenue streams and boosting monetization, which should drive both top-line growth and incremental improvements in net margins as premium content and subscriptions scale.
  
• Continued momentum in global internet penetration, smartphone adoption, and emerging market engagement (e.g., Lens, Circle to Search, virtual try-on) is enlarging Alphabet's addressable market and supporting scalable ad and subscription revenue expansion.
  
• Alphabet's significant investment in custom AI hardware (TPUs), software optimization, and R&D is expected to further improve operating leverage, translating sustained innovation leadership into higher productivity, operating margins, and long-term earnings growth.

Alphabet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alphabet's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.1% today to 28.9% in 3 years time.
• Analysts expect earnings to reach $148.4 billion (and earnings per share of $12.81) by about September 2028, up from $115.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $126.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.9x on those 2028 earnings, down from 25.1x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 17.0x.
• 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 record-high capital expenditures-forecasted to reach $85 billion in 2025 and likely to increase into 2026-will place sustained pressure on net margins and earnings due to accelerating depreciation and infrastructure costs, creating long-term risk if revenue growth does not keep pace.
  
• Despite robust growth in Search and YouTube, Alphabet remains highly dependent on advertising revenues from these sources, and any shift in consumer behavior toward alternative platforms (such as VR, AR, decentralized social, or privacy-centric apps) or slowing ad market growth could reduce revenue and compress profitability.
  
• Increasing legal and regulatory pressures-including a $1.4 billion legal settlement this quarter, ongoing antitrust scrutiny globally, and tightening data privacy laws-pose ongoing risks to Alphabet's core business models, potentially forcing structural changes that could lower market share and long-term earnings power.
  
• Alphabet's substantial investments in "Other Bets" businesses, notably Waymo and experimental hardware (e.g., AI-enabled glasses), continue to generate significant operating losses without a clear path to material profitability, potentially eroding group net margins if these efforts fail to scale commercially.
  
• Elevated competition in both digital advertising (from platforms like Amazon, TikTok, and retail media networks) and cloud (from AWS, Azure, and open-source AI providers), coupled with industry trends such as increased ad blocking and a shift to zero-click/AI-overview search responses, could erode Alphabet's ad pricing power and reduce core revenue and earnings growth over the long term.

Valuation

• The analysts have a consensus price target of $231.48 for Alphabet based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $512.6 billion, earnings will come to $148.4 billion, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of $239.63, the analyst price target of $231.48 is 3.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.