To The Moon

$Alphabet(GOOG)$

Welcome back! After a strong year and reaching new all-time highs, Alphabet's stock has recently dipped for several reasons. Despite exceeding expectations, the stock fell on earnings release day, primarily due to concerns over capital expenditures (CapEx).

Alphabet Investment

The company has been investing heavily, and with projects like DeepMind and other AI initiatives, the market is questioning whether these investments will pay off. Additionally, Alphabet’s cloud revenue grew by only 30%, falling short of market expectations and raising concerns about its growth potential.

That said, increased investment is often a positive sign, especially for a company with Alphabet’s track record. Their substantial CapEx is directed toward AI infrastructure, which has the potential for significant long-term returns. Interestingly, while many companies are praised for announcing AI investments, the market sometimes reacts negatively when companies actually commit significant funds rather than just discussing plans.

Earning Overview

Alphabet Inc. (GOOGL) reported strong Q4 2024 earnings, with revenue rising 12% year-over-year to $96.5 billion and EPS increasing by 31%, surpassing analyst expectations. Google Cloud revenue grew 10% to $12 billion, while YouTube advertising saw a 14% increase, reaching $10.5 billion. The company announced plans to invest approximately $75 billion in capital expenditures for 2025, primarily for AI infrastructure, significantly higher than the $32.3 billion spent in 2023. Despite these positive results, Alphabet's stock declined due to concerns over increased spending and slightly lower-than-expected revenue figures. As of February 27, 2025, GOOGL stock traded at $172.73, down 1.53%. The earnings highlight Alphabet’s continued strength in cloud and advertising, along with its commitment to AI-driven investments.

Fundamental Analysis

Alphabet isn't a speculative stock—it's one of the strongest tech giants in the world. A similar situation recently occurred with Amazon, which saw its earnings per share (EPS) drop by 25% due to major investments, despite reporting record profits. The market’s skepticism about these investments before they even materialize seems questionable and possibly irrational.

Looking at Alphabet’s financials, the company reported record cash flow last year despite a 60%+ increase in CapEx. This year, CapEx is expected to reach nearly $70 billion, but operational growth remains impressive. With a market cap of approximately $2.35 trillion, its price-to-earnings ratio of 33.5 is on the higher end of historical averages but not excessively overvalued. However, market sentiment plays a crucial role—if overall confidence drops and valuations contract, a significant decline is possible.

Alphabet remains in a strong financial position, with cash and equivalents nearly covering current liabilities and minimal long-term debt. The company’s equity position has also improved, but for a tech company, traditional balance sheet metrics don't fully capture the value of intangible assets like YouTube and Google Search. Accounting standards still struggle to reflect the worth of such digital assets accurately.

Dividend And Buy Back

The company recently introduced a small dividend while maintaining aggressive share buybacks, repurchasing $50–$70 billion in stock annually. Similar to Amazon, Alphabet’s valuation gives it leverage—its stock can be used strategically for acquisitions rather than relying on cash. The introduction of Class C shares over a decade ago was designed for such purposes, which is why they lack voting rights, unlike Class A shares.

Market Sentiment and Investment Impact

A key point to remember about major investments is that stocks, particularly in the tech sector, rely heavily on growth. If a company under delivers or if the market anticipates slower growth, significant sell-offs can happen. A great example is Meta a few years ago when a loss of market confidence led to severe undervaluation.

To put market growth into perspective: roughly 71% of the S&P 500’s total returns from 1980 to 2024 came from just the past decade. While the S&P has performed well historically, much of its returns were concentrated in recent years, thanks to compounding and an unprecedented market boom. Many believe this level of growth is unsustainable, but factors like improved investment accessibility could support it. Investing today is easier than ever, with commission-free trading and widespread availability through various apps, which has fueled retail participation—especially since 2020.

Retail investors contribute to market volatility, which in turn influences trading algorithms and large funds. This creates a dynamic where a stock like Alphabet can either have a safety net or experience sharp declines—there’s often little middle ground. If Alphabet’s valuation drops to a price-to-earnings ratio (P/E) of around 20–25, many investors may see it as a buying opportunity. However, if market confidence erodes and major funds start selling, things could get ugly—similar to what we saw with Meta and even Alphabet during past downturns.

Cash Flow

In Q4 2024, Alphabet Inc. reported free cash flow of $24.8 billion, bringing its total for the year to $72.8 billion, reflecting strong operational performance. Operating income rose 31% to $31 billion, with an operating margin of 32%, highlighting the company's financial strength. Alphabet also maintained substantial cash reserves and minimal debt, positioning it well for its planned $75 billion capital expenditure in 2025, primarily focused on AI infrastructure. Despite concerns over increased spending, the company’s strong cash flow and profitability reinforce its long-term growth strategy.

Risks: Competition, Politics, and Regulation

Beyond financial performance, there are ongoing risks, including competition, political scrutiny, and the need for continued investment to meet market expectations. Regulatory concerns remain significant, with renewed discussions about breaking up big tech firms—particularly Google—by the U.S. Department of Justice. We may hear more about this around April, but for now, it remains uncertain.

Alphabet’s Valuation Scenarios

Bearish Case (Tough Market Conditions, Increased Competition, Regulatory Issues): If Alphabet stabilizes at around $50 billion in cash flow per year and the P/E ratio drops to 20, this would imply a market cap of $1 trillion—leading to a 50% stock decline to around $8,245 per share. Share buybacks could offset some of this impact, but the drop would still be substantial.

Moderate Growth Scenario (10% Cash Flow Growth, Higher CapEx Needs): If Alphabet grows its cash flow to $116.7 billion by 2030 with a P/E ratio of 30, its market cap would be $3.2 trillion, resulting in a share price of $28,764—a 50% gain. Factoring in buybacks, the upside potential could be even greater, possibly doubling.

Bullish Case (15% Annual Growth, Strong AI & Cloud Investments Pay Off): If Alphabet’s investments drive 15% annual cash flow growth, reaching $145.82 billion in five years with a P/E ratio of 35, its market cap could hit $5.1 trillion—leading to a 120% stock increase to $41,913 per share. With buybacks, this upside could be even higher. Alphabet could also introduce a meaningful dividend if management sees its stock as overvalued.

Conclusion

Alphabet remains one of the healthiest and most profitable companies, with record-high investments, minimal debt, and strong cash flow. While the stock carries risks—such as regulatory challenges and market confidence fluctuations—it also has massive upside potential. Personally, I prefer to buy at the lowest possible price, but at current levels, it still appears reasonably valued given its aggressive buybacks, AI investments, and even its small dividend.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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