So far in 2025, Alphabet (Google) has been the worst performer among the Mag 7, with the stock down about 11% YTD. Since February, I’ve watched the share price drop hard from around $207 to $141 before bouncing back to about $170 today. While the S&P 500 has recovered most of its losses, Google has barely clawed back a third of what it lost, which really highlights just how much it’s lagging behind the broader market.
Why Alphabet’s AI Infrastructure Makes Today’s Price a Bargain
GOOG Data by GuruFocus
Sure, the broader macro environment has played a role, but I think investors have mostly been spooked by bigger issues like rising fear around AI disrupting Google Search, the antitrust drama in the U.S. about its ad dominance, and newer players like DeepSeek stirring up competitive pressure. On top of that, there’s a lot of debate over whether Google is spending too much on AI. Even with all this noise, I personally think Google looks quite attractive here. The company is still growing its revenue at double-digit rates, margins are improving, free cash flow is strong, and the shareholder return is nothing to ignore around 4% annually when you add in buybacks and dividends. At about $170 per share, I see Google as a rare combo of a solid growth business trading at a pretty reasonable price, and in this market, that’s not easy to find.
One thing that really stands out about Google is how it controls nearly everything in-house. Unlike other AI companies, Google doesn’t need to rely on third-party infrastructure. It already has an extensive global network of data centers built out over years to power search, and now it’s doubling down by building more of them to support AI. This is a big deal because OpenAI, for example, doesn’t have the ability to build these data centers by itself, which is why it’s closely partnered with Microsoft.
While Microsoft can match Google in terms of investment power, it still relies on OpenAI for models like ChatGPT. That creates a different kind of setup compared to Google’s tighter integration between its models (like Gemini) and its own infrastructure. I think this gives Google a real edge when it comes to competing in AI, because it owns the entire tech stack and has direct access to the world’s largest information index. It also means Gemini can scale more efficiently and deliver better performance long term since everything runs within Google’s own systems. From my point of view, this is a big strategic advantage that I don’t think gets enough attention.
A lot of investors seem worried about how much Google is spending on AI and building more data centers. Personally, I don’t see this as a bad thing. If anything, it shows that Google is taking its position seriously and investing to stay ahead. It’s not just throwing money around it’s trying to protect its edge and make sure it remains a major player in AI and data. I believe these investments are a sign of long-term commitment and not a red flag. Google’s ability to collect, manage, and use information at scale puts it in a unique position compared to competitors who need to rent capacity or partner up just to keep up.
One of the loudest bear arguments is that tools like ChatGPT are taking away from Google’s core search business. I hear this all the time, but when I look at the numbers, it just doesn’t add up. Based on Bank of America data, Google only lost 6 basis points of market share month-over-month which is less than 1% annualized. That’s barely a dent, especially when you consider the market itself is still growing.
Some people are saying search is over because users turn to AI now, but Google’s Search revenue tells a different story. Back in 3Q22 before ChatGPT launched Google’s Search & Other revenue was around $39.5 billion. That number grew to over $50.7 billion in 1Q25. Adjusted for seasonality, search is doing better than ever. I think people are confusing a shift in habits with actual revenue loss, which just isn’t the case yet.
Plus, even if a company like Apple builds its own AI, it would still need massive data resources to make it useful and a lot of that web data is indexed by Google anyway. There’s also a big difference between losing market share on commercial queries versus non-commercial ones. Google only shows ads on around 20% of queries, which are the ones that actually bring in money. Losing non-monetizable traffic isn’t the same thing as losing revenue. Also, if the overall pie of search traffic grows, a smaller share could still mean a bigger slice in real dollar terms.
Another piece I think people forget about is Waymo. On the last earnings call, Sundar Pichai mentioned that Waymo is now handling about 250,000 driverless rides per week that’s five times what it did a year ago. I see Waymo as a kind of hidden upside for Google. Some outside investors, like Andreessen Horowitz and T. Rowe Price, already own a piece of it, and Bloomberg values it close to $50 billion. Waymo’s expansion plans for 2025 include big cities like Miami, Atlanta, and Washington, D.C., and even small market success could unlock a lot of value. I think of it like a long-term option built into Google. It’s not driving profits yet, but it has the potential to be a big win if self-driving technology takes off.
While a lot of people are caught up in the AI hype, I’ve noticed something else: Google’s core business is actually reaccelerating. In the most recent quarter (April 24), revenue grew 12% YoY which beat earlier expectations of around 10%. I believe Search is bouncing back because of strong demand for ad space and high-intent queries that drive better monetization.
YouTube is also gaining momentum again. Shorts is pulling in more users, and ad revenue on YouTube was up 10% YoY. Cloud revenue came in a bit lighter than Azure, at 28% growth, but that’s mainly due to temporary capacity issues. Google already said it plans to fix that later this year, so I’m not too concerned. In fact, I think Cloud will speed up again once more infrastructure comes online.
Google’s push into AI is expensive, no doubt, and R&D has taken a toll on margins. But overall, profitability is still strong. Last year’s gross margin was around 58.5%, and I think this will keep trending up as Google moves away from pure ad revenue and leans more into Cloud and AI. Operating margin might have dipped recently, but I expect it to rise from about 33% now to around 36% by 2030 and possibly 38% by 2034 as they scale up.
One risk I do see is the huge $75 billion CapEx spend, which will likely put pressure on free cash flow in 2025. But I also think this is just a short-term issue. CapEx should come down a bit over the next couple of years as a percentage of revenue. And honestly, Google can afford it. With nearly $95 billion in cash and only around $11 billion in debt, they’re in a great spot financially. Even with the elevated CapEx, Google still has the ability to pay a dividend (even though the growth wasn’t as high as I expected), continue stock buybacks, and even go after big acquisitions like the purchase of Wiz, the cybersecurity company. So, while high spending might look scary at first glance, I think it’s part of a solid long-term strategy to stay ahead.
To me, Google really feels like it’s trading more like a classic value stock than a typical high-growth tech name. Right now, it has solid double-digit revenue and earnings growth that I think can keep going strong for years. But despite that, it’s only trading at around 19x earnings. That’s not just low when compared to peers like Amazon or Nvidia with P/Es of 30x or even 50xit’s actually below the market average. And this is for a company that’s still growing fast and sitting at the center of the AI boom.
Why Alphabet’s AI Infrastructure Makes Today’s Price a Bargain
GOOG Data by GuruFocus
Over the past decade, Google’s average P/E has hovered closer to 30x. So to me, the current valuation looks like the market is already pricing in some worst-case scenariolike Apple cutting ties with Google Search or some other disruption in its core business. But when I look at the company’s actual performance, I just don’t see any real weakness in execution. The fundamentals still look very strong. In fact, I see other companies in the market with just steady performance and no real AI growth story, and they’re still trading around 25x earnings. That tells me Google’s stock already justifies its current price purely on the strength of the existing business. And if I factor in all the upside from AI, cloud, YouTube, and Waymo, it seems clear the market is being too cautious.
I believe this is where the opportunity lies. If Google can keep delivering and showing its edge in AIthanks to its search engine, data scale, and infrastructureI think we could see its P/E multiple expand back toward 25x over the next year or two. That would push the stock toward a target price of $224, which is more than 30% higher from here. Considering the company’s vertical integration, resource advantage, and long-term prospects, I’m confident this upside is very much within reach. That’s why I’d recommend buying Google stock. I believe there’s a strong case for long-term upside, and right now, it feels like you’re paying a fair price just for the current businesswith all the AI growth coming basically for free.
I also dug into the latest 13F filings to see what the marquee investors are doing with GOOG, and it adds another layer to my bullish case. First Eagle Investment (Trades, Portfolio) stepped up its stake by about 7.5%, Seth Klarman (Trades, Portfolio) jumped in with a massive 45.7% increase, and David Tepper (Trades, Portfolio) added nearly 7% more shares. Meanwhile, Renaissance Technologies (Trades, Portfolio) initiated a new position, which to me signals that a quant giant sees real value here. Even Tom Gayner (Trades, Portfolio) at Markel didn’t trim his holding, despite the market wobble.
At the same time, a number of long-term holders like Dodge & Cox, Primecap, and Baillie Gifford (Trades, Portfolio) only made modest reductionsmostly under 6%which tells me they’re simply rebalancing, not bailing out. In my view, when you see heavy hitters like Klarman and Tepper adding, alongside quants jumping in, it underlines that smart money believes Google’s pullback is a buying opportunity. That collective vote of confidence from such a diverse set of gurus bolsters my conviction that Google is attractively priced right now.
Google’s pullbackdown about 11% YTD and lagging the rest of the Mag 7doesn’t reflect the strength I see in its business. At roughly 19x earnings, Google trades well below its 10-year average of nearly 30x and below peers even without the same AI story. I believe the market has overreacted to fears of AI search disruption and Apple’s potential moves, and in doing so, it’s underpricing a company that still delivers double-digit revenue and earnings growth, expanding margins, and robust free cash flow.
The real pivot here is Google’s shift into a fully integrated AI platform. With its own data centers, proprietary models like Gemini, and a vertical stack from search to cloud to YouTube, Google can monetize AI more efficiently than anyone else. Add in the embedded upside of Waymo’s rapid ride-count growth, accelerating Cloud capacity coming online, and disciplined capital returnsincluding buybacks and dividendsand you’ve got a recipe for multiple expansion. In my view, a move back toward 25x earnings over the next year or two puts a $224 price target within reach, implying more than 30% upside. Of course, investors should watch for high CapEx stressing free cash flow, potential antitrust headwinds, and competition from other AI players. But with marquee investors like Seth Klarman (Trades, Portfolio) and David Tepper (Trades, Portfolio) adding to their stakesand quant shops like Renaissance initiating new positionsI see strong conviction that today’s price is a rare entry point. For anyone in search of a long-term AI play with proven execution, I believe Google is one of the best names to own right now.
