Alphabet (GOOG 1.83%) (GOOGL 1.69%) reported fantastic first-quarter 2025 earnings. It moreover raised its dividend by 5%, marking the first elevate since Alphabet initiated its dividend closing 12 months.
And however, Alphabet stays to be down massive 12 months to this point — underperforming the Nasdaq Composite (^IXIC 1.51%) and loads of of its megacap improvement stock mates.
For this reason Alphabet’s latest outcomes reinforce its underlying funding thesis and why Alphabet is a primary improvement stock to buy now.
Image provide: Getty Pictures.
Alphabet’s blowout quarter
There was tons to like from Alphabet’s latest print.
Earnings jumped 12% whereas working income grew by 20% and diluted earnings per share (EPS) skyrocketed 49%.
Extreme-margin segments like Google Search and YouTube have led to steadily rising revenue and a 10-year-high working margin.
GOOGL Earnings (TTM) data by YCharts
Alphabet breaks up its enterprise into two segments: suppliers and Google Cloud.
Corporations embody Google Search, YouTube, Google Group, and subscriptions, platforms, and models.
Corporations launched in $77.26 billion in revenue inside the present quarter, $50.7 billion of which was Google Search. The part’s working income was a whopping $32.68 billion — good for a 42.3% working margin.
Within the meantime, Google Cloud launched in $12.26 billion in revenue — a 28% year-over-year improve. Nevertheless it absolutely solely booked $2.18 billion in working income for an working margin of 17.8%. Granted, margins could very properly be tons elevated if Alphabet weren’t in development mode. Nonetheless margins are low on account of Alphabet is pouring sources to try to take market share from rivals like Amazon Web Corporations and Microsoft Azure.
Risks worth considering
Alphabet’s outcomes had been fantastic, so consumers may be questioning why the stock worth stays overwhelmed down. Arguably, the two main causes are Alphabet’s elevated spending and uncertainty in regards to the sustainability of Google Search.
Alphabet’s capital expenditures (capex) inside the present quarter had been $17.2 billion — a staggering 43% improve compared with the first quarter of 2024. Within the interim, Alphabet can take up elevated capex because it’s rising revenue and dealing margins at such a strong tempo. Nevertheless it absolutely should maintain the tempo to justify elevated spending.
The elephant inside the room is Google Search. As talked about, Google Search advert revenue topped $50 billion inside the present quarter, or 56.2% of entire revenue. Nonetheless Google Search is beneath stress from rival data sources like ChatGPT and even TikTok and Meta Platforms‘ Instagram, which youthful generations are an increasing number of using to hunt for information and content material materials. Closing week, Meta Platforms launched a stand-alone AI app powered by Llama 4 — its latest large language model.
In sum, it’s unclear if Alphabet’s extreme capex will repay or if Google Search will hold as dominant as a result of it has been for a few years. Or put one different technique, it seems Alphabet is on the defensive, whereas mates like Meta have a clearer trajectory in direction of sustainable improvement.
Returning tons of capital to shareholders
Alphabet’s rising rivals mustn’t overshadow its impeccable capital return program. Throughout the present quarter, Alphabet spent $17.5 billion on its capital return program — consisting of $15.07 billion in buybacks and $2.43 billion in dividends. It’s good that Alphabet is now paying a dividend, nonetheless buybacks are nonetheless magnitudes greater.
The run worth of the capital return program for a full 12 months is about $70 billion, or 3.5% of Alphabet’s roughly $2 trillion market cap. That signifies that if Alphabet solely paid dividends and didn’t repurchase stock, it’d yield 3.5%.
Buybacks have a critical impression over time on account of they reduce the wonderful share rely — thereby rising EPS. Dividends, in opposition to this, are a one-time revenue, and shareholders ought to pay taxes on dividends in non-retirement accounts.
Over the previous 5 years, Alphabet has diminished its share rely by a staggering 10.9%. That’s virtually as so much as Apple‘s 12.3% low cost — and Apple is believed for its aggressive buybacks. Buybacks have allowed Alphabet’s EPS to develop so much faster than web income — giving Alphabet a mud low value valuation.
Too low value to ignore
Out of the “Magnificent Seven” firms — Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla — Alphabet has the underside price-to-earnings (P/E) ratio at merely 17.7 and price-to-free-cash-flow ratio at 26.2.
Alphabet’s low value valuation shows investor skepticism on its capability to monetize artificial intelligence relative to completely different megacap improvement firms. Nonetheless that doubt is arguably baked into Alphabet’s valuation.
A 17.7 P/E ratio is just not merely low — it’s a bargain-bin diploma for a high-margin agency that continues to develop at a strong worth. For context, protected and stodgy dividend-paying Procter & Gamble has a P/E ratio over 25. That’s no knock on P&G, as a result of it deserves a premium valuation. Nonetheless P&G doesn’t have Alphabet’s improvement prospects or margins.
A balanced buy at a compelling valuation
Alphabet is commonly thought-about as a improvement stock, nonetheless its earnings plenty of locations it in price stock territory. The dividend yield of 0.5% is misleading, considering Alphabet spends the vast majority of its capital return program on buybacks.
Alphabet is priced as whether or not it’s doomed to margin compression and misplaced market share — when its outcomes level out the choice. Patrons are getting an distinctive various to scoop up shares of Alphabet whereas they’re caught inside the low cost bin.
Nonetheless, in case you do buy Alphabet, it is worth holding a superb watch over its capex, its capability to take market share from completely different cloud rivals, and the resiliency of Google Search inside the face of mounting rivals.
Suzanne Frey, an authorities at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market enchancment and spokeswoman for Fb and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Full Meals Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the subsequent selections: prolonged January 2026 $395 calls on Microsoft and fast January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure protection.
