TipRanks Smart Value #11: Tech Treasure
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Dear Investors,
Dear Investors,
Welcome to the eleventh edition of our recently launched TipRanks Smart Value Newsletter!
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This Week’s Top Value Pick: Alphabet (GOOGL)
Alphabet (GOOGL), is a U.S.-based global technology leader, primarily known for its Google services, specializing in search, cloud computing, AI, and digital advertising. Its products, including Google Search, YouTube, Android, and Google Cloud, serve consumers, businesses, and developers worldwide. With a focus on innovation in AI, autonomous driving, and healthcare, Alphabet operates a vast network of data centers and R&D facilities globally. With a market cap of over $2 trillion and annual revenues of nearly $360 billion, Alphabet ranks #17 in the Fortune 500 list. It is one of the “Magnificent Seven” technology market leaders.
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Search Pioneer
Alphabet’s journey began in 1998 when Stanford Ph.D. students Larry Page and Sergey Brin launched Google, a search engine project that quickly gained traction for its innovative PageRank algorithm, revolutionizing how the internet was indexed and searched. Google’s rapid growth led to its 2004 IPO, raising $1.67 billion and cementing its position as a tech powerhouse. This capital influx funded a series of transformative projects, including the launch of Gmail in 2004, Google Maps in 2005, and the $1.65 billion acquisition of YouTube in 2006, significantly broadening its portfolio and advertising revenue streams.
In 2015, Google restructured into a new parent company, Alphabet, to separate its core internet businesses (like Google Search, YouTube, and Android) from more experimental ventures like Waymo (autonomous driving) and Verily (life sciences). This move was designed to improve financial transparency, direct focus towards innovation, and reduce operational risk by allowing each unit to operate more independently. The restructuring also reflected Alphabet’s broader ambitions beyond search, including healthcare, AI, cloud computing, and autonomous vehicles.
One of Alphabet’s most critical growth areas has been Google Cloud, which emerged as a significant revenue driver, competing directly with Amazon Web Services (AWS) and Microsoft Azure. By 2025, Google Cloud had achieved consistent profitability, supported by cutting-edge AI integrations like its Gemini models, which helped boost enterprise adoption. This expansion into cloud services has become a cornerstone of Alphabet’s growth strategy, contributing significantly to its bottom line.
Meanwhile, Alphabet’s Android operating system, launched in 2008, became the world’s dominant mobile platform, powering billions of devices globally and supporting the rapid growth of the Google Play ecosystem. Strategic acquisitions, such as DeepMind in 2014, accelerated its AI capabilities, enhancing everything from search algorithms to YouTube recommendations and autonomous driving technologies.
As of 2025, Alphabet’s diverse portfolio, spanning cloud computing, AI, subscriptions like YouTube Premium, and hardware like Pixel devices, has solidified its position as a global tech leader, driven by sustained innovation and strategic investments in next-generation technologies.
Alphabet’s expansion has long been rooted in its dominance of Internet search. After decades at the helm, Google remains the dominant player in the global search market, with about 90% market share. Although Google Search is facing challenges – primarily from AI search features – Alphabet is embedding generative AI into its core search experience, notably through AI Overviews, which now reach over 1.5 billion users monthly. The company is also investing heavily in real-time tools like Gemini Live to keep users engaged within its ecosystem, while defending its position through commercial partnerships and integration across Android and Chrome. Despite increased competition from AI-driven alternatives and shifting user habits, Google’s scale, infrastructure, and deep integration across digital touchpoints continue to reinforce its leadership in search.
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Smart Expansion
Alphabet has built a powerful technology ecosystem over the past decade through a series of strategic acquisitions, strengthening its capabilities in AI, cloud computing, cybersecurity, and health tech. A pivotal move came in 2014, when Alphabet acquired DeepMind – a London-based AI startup – for over $500 million, laying the foundation for its AI dominance. This acquisition has fueled advancements in search algorithms, YouTube recommendations, and its cutting-edge Gemini AI models. In 2023, Alphabet took this integration further by merging its Google Research Brain team with DeepMind, consolidating its AI efforts amid intensifying competition.
In 2014, Alphabet also expanded into the smart home market with the $3.2 billion purchase of Nest Labs, aligning its portfolio with the rapidly growing Internet of Things (IoT) sector. This was followed by the $625 million acquisition of Apigee in 2016, boosting Google Cloud’s API management capabilities and supporting its enterprise push. In 2020, Alphabet strengthened its cloud data analytics offerings with the $2.6 billion acquisition of Looker, enhancing its ability to compete with Amazon Web Services (AWS) and Microsoft Azure.
Alphabet’s foray into health tech gained momentum in 2021 with the $2.1 billion purchase of Fitbit, providing access to 120 million users and valuable health data. A year later, it bolstered its cybersecurity footprint with the $5.4 billion acquisition of Mandiant, enhancing Google Cloud’s security offerings as demand for robust cloud protection surged.
Most recently, in March 2025, GOOGL made its largest-ever acquisition, purchasing Israeli cloud security firm Wiz for $32 billion. This move is poised to transform Google Cloud into a leading cloud-native, multi-cloud cybersecurity provider, enhance its competitive position against AWS and Microsoft’s Azure, and accelerate innovation in AI-driven security solutions. The acquisition is expected to close next year.
However, this aggressive expansion strategy has drawn regulatory scrutiny. In 2024, Alphabet faced a major antitrust ruling in the U.S. over monopolistic search and digital advertising practices, casting uncertainty over its future M&A ambitions as regulators intensify their oversight of Big Tech. This regulatory climate extends beyond M&A. Alphabet also faces intensifying scrutiny in the U.S. and EU over its dominance in search and digital advertising, as well as emerging compliance demands for its AI models like Gemini. The company is actively building legal and compliance frameworks to navigate this evolving landscape and mitigate operational risks.
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AI Surge
Alphabet, the parent company of Google, operates through three main segments: Google Services, Google Cloud, and Other Bets. Google Services – which accounted for 86% of Alphabet’s Q1 2025 revenue – remains the core of its business, driven by digital advertising, subscriptions, and hardware. Google Search, benefiting from over 5 trillion annual searches, is the largest contributor for this segment, leveraging AI features like AI Overviews to deliver highly targeted ads. YouTube, with 125 million Premium subscribers and a vast content library, adds substantial ad and subscription revenue. YouTube Premium and Google One together have reached 270 million paid subscriptions in Q1 2025.
Meanwhile, Alphabet’s Other Bets segment, though the smallest, is its most diverse, encompassing everything from fiber broadband and smart homes to ambitious “moonshot” projects like self-driving cars (Waymo), delivery drones, robotics, and biotech. Waymo has scaled to over 250,000 weekly paid trips in Q1, a fivefold increase year-over-year, with expansions planned for cities like Atlanta, Washington, D.C., and Miami.
Google Cloud, another critical growth driver, provides AI infrastructure, enterprise solutions, and cybersecurity tools, competing directly with Amazon Web Services (AWS) and Microsoft Azure. AI remains central to Alphabet’s growth strategy. The Gemini 2.5 Pro model drove a 200% increase in AI Studio and Gemini API users in Q1, while AI Overviews in Search now reach 1.5 billion monthly users. New tools like Gemini Live, for real-time interactions, and DeepResearch, an autonomous AI agent, are further boosting adoption.
YouTube continues to expand its reach, with Shorts viewership up 20% and improved monetization in the U.S. The platform is set to stream its first-ever live NFL game for free on September 5, aiming to expand its audience further. YouTube also holds a Sunday Ticket deal with the NFL, valued at roughly $14 billion over seven years. YouTube users can view the Sunday Ticket games priced at $378 annually for YouTube TV subscribers or $480 without a subscription to YouTube TV.
As it enters the second quarter, Alphabet has warned that broader macroeconomic pressures could hit advertising budgets, which could impact its advertising revenues. However, Alphabet’s data-driven insights and advertiser tools position it well to help clients adapt, supporting resilience in its ad business even in a challenging environment.
GOOGL is actively managing costs through slower compensation growth and more efficient use of infrastructure, though its heavy investment in AI and cloud infrastructure continues.
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Financial Power
Alphabet has demonstrated impressive financial growth over the past five years, with revenues and earnings per share increasing at a CAGR of 16.6% and 29.3%, respectively. Alphabet’s EPS came in at $2.81, well above the analysts’ consensus estimate of $2.01.
This strong performance has been driven by rapid growth in digital advertising, the expansion of Google Cloud, innovation in AI, and increased subscription and device sales. Operational efficiencies have also played a key role in boosting profitability.
In Q1 2025, Alphabet reported revenues of $90.2 billion, up 12% year-over-year (14% in constant currency), beating market expectations. This growth was broad-based, with its core segment, Google Search and Other, generating $50.7 billion in revenue – up 10% YoY – supported by features like AI Overviews. YouTube advertising also posted a 10% gain, with revenues reaching $8.9 billion, driven by rising subscriber numbers and increased engagement through Shorts. Meanwhile, Subscriptions, Platforms, and Devices revenue rose 19% to $10.4 billion, bolstered by products like YouTube Premium and Google One.
Operating income grew significantly, with margins improving due to moderate compensation expenses and a favorable revenue mix shift toward higher-margin products. However, this was partially offset by a $1 billion year-over-year increase in depreciation, driven by GOOGL’s ongoing investment in AI and cloud infrastructure.
Google Cloud, a critical growth driver, saw a 28% revenue surge to $12.3 billion, outpacing AWS abut trailing Azure – highlighting Alphabet’s strong momentum in the cloud space while still playing catch-up to its closest rival, Microsoft. Google Cloud has solidified its status as the third-largest global cloud provider, capturing 12% of the global cloud infrastructure market in Q1 2025, up from 11% in Q1 2024. This growth is attributed to its differentiated, full-stack approach to AI, which has been central to its expansion. Notably, Google Cloud’s operating income more than doubled to $2.2 billion, up from $900 million in the same quarter last year, indicating significant improvements in operational efficiency and scale. The company’s focus on AI has been pivotal, with the successful deployment of its Gemini 2.5 model driving increased adoption across various sectors. Additionally, strategic partnerships, such as the planned Wiz acquisition, are set to enhance Google Cloud’s cybersecurity offerings, further strengthening its competitive edge in the cloud services market.
Looking ahead, Alphabet plans to invest $75 billion in capex for 2025, focusing on AI infrastructure – including its Ironwood TPU1 and NVIDIA GPU partnerships – to support growth across Google services, Google Cloud, and Google DeepMind. This ongoing investment, combined with expanding operating margins in Google Cloud, positions Alphabet for continued earnings and free cash flow growth.
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1 – Ironwood is Alphabet’s in-house Tensor Processing Unit (TPU), purpose-built to accelerate artificial intelligence workloads, particularly for large language models and other generative AI applications.
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Hidden Gem
Alphabet has implemented a balanced capital return strategy, combining dividends and stock buybacks to reward shareholders while maintaining flexibility for future growth. In Q1 2025, the company’s Board of Directors declared a 5% increase in its quarterly dividend, raising it to $0.21 per share – up from its inaugural dividend of $0.20 per share in 2024 – reflecting its shift toward returning more capital to investors.
Despite the increase, Alphabet’s dividend yield remains modest at 0.48%, well below the tech sector average of 1.9%. This reflects the company’s deliberate decision to retain the majority of its earnings, as shown by its low payout ratio of 8.9%. The conservative approach offers substantial room for future dividend hikes, supported by Alphabet’s strong and growing cash flow.
The company is also aggressive with its stock buyback strategy. In Q1, the company repurchased $15.3 billion worth of shares, part of a broader capital return program. As of March 31, 2025, $29.5 billion remained available under its prior $70 billion share repurchase authorization. In April 2025, the board approved an additional $70 billion in buybacks, bringing Alphabet’s total repurchase capacity to $99.5 billion. Over the past five years, this aggressive buyback approach has reduced Alphabet’s share count by 11%, enhancing earnings per share and supporting share price appreciation.
The tech giant’s financial strength underpins these shareholder returns. As of March 31, 2025, Alphabet held nearly $95.3 billion in cash and marketable securities. It also generated $18.95 billion in FCF during Q1 and $74.88 billion over the trailing twelve months, representing a free cash flow margin of 20.8%, among the highest in the tech sector. Furthermore, GOOGL’s return on equity of 35.2% is ranked among the top 10% in the tech industry.
Despite strong Q1 and robust fundamentals, Alphabet’s shares have declined 5.9% over the past year, underperforming both the tech-heavy Nasdaq index and its Magnificent Seven peers. The stock currently trades at a P/E ratio of 18.3x – below the tech sector median of 19.6x and nearly 32% below its five-year average – highlighting a notably modest valuation compared to its large-cap tech peers.
Still, Wall Street remains optimistic about GOOGL’s long-term prospects. Analysts have set an average upside potential of about 19%, with some estimates reaching as high as 44%, driven by Alphabet’s leadership in AI, cloud computing, and digital advertising. Discounted cash flow models also indicate that GOOGL could be undervalued by over 35%, reflecting its strong free cash flow generation and ongoing investments in high-growth areas.
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Investing Takeaway
Alphabet presents a compelling value proposition for long-term investors. Following the recent share price underperformance, the stock trades at a very attractive valuation compared to its historical levels and sector peers. With a diverse portfolio spanning search, cloud, AI, and digital advertising, the company is well-positioned for growth. Its strong free cash flow, robust balance sheet, and disciplined capital return strategy, including significant share buybacks, provide a solid foundation for future appreciation, while analysts remain optimistic about its long-term growth potential.
