Analyzing Alphabet: A Red Flag and a Green Flag for 2025

Understanding the risks that could lead an investment to fail is as crucial as recognizing the reasons for potential success. This is particularly pertinent when considering a company like Alphabet (GOOG, GOOGL), which is currently sending mixed signals to investors.

On one hand, Alphabet's advertising business remains stable, its cloud computing and artificial intelligence (AI) divisions are flourishing, and the stock appears to be undervalued. Conversely, the Department of Justice (DOJ) is pursuing legal action to dismantle Alphabet on allegations of illegal monopoly concerning its Google Chrome browser. This raises the question: should investors be more concerned about this ongoing investigation?

Red Flag: Alphabet Under DOJ Scrutiny

The DOJ has been investigating Alphabet for a significant period, and it seems to have finally made a breakthrough. A court has determined that Google, a subsidiary of Alphabet, has engaged in monopolistic practices. As a result, the DOJ is advocating for the divestment of Google Chrome as part of a legal remedy. The ultimate outcome of this case remains undecided and could potentially take years to resolve.

Alphabet does have the option to appeal to the Supreme Court, a process that could prolong the legal proceedings. Consequently, this situation is likely to cast a shadow over Alphabet for some time. Nonetheless, the company may already be strategizing on how to mitigate the impact of potentially losing Google Chrome.

A historical precedent can be drawn from the antitrust case against Microsoft in the early 2000s. After being ruled to have engaged in monopolistic behavior in 2000, Microsoft faced a drawn-out legal battle that extended over four years before a resolution was reached.

Considering these timelines, Alphabet still has a considerable journey ahead before the final decision is made in this case. That said, investors should avoid making hasty decisions to exit their positions based solely on this development.

Thus, this “red flag” may serve more as a distraction than a cause for immediate concern for 2025.

Green Flag: Robust Growth in Google Cloud and AI

If one were to examine Alphabet's financial results, it might seem that the stock price should be performing better than it currently is. In Q3, the company reported that revenue grew by 15% year over year, and earnings per share (EPS) increased from $1.55 to $2.12, reflecting a significant 37% rise. These commendable results can largely be attributed to the surge in its cloud computing segment.

Alphabet's Google Cloud has gained substantial traction thanks to its broad range of AI tools. A key advantage of Google Cloud is its access to advanced GPUs and proprietary TPUs (tensor processing units). When utilized for the right workloads, TPUs can dramatically outperform GPUs, leading to notable savings in both costs and time associated with AI model training. For numerous organizations, opting for a service like Google Cloud has proven to be a more efficient and economical route for developing AI capabilities, contributing to its rising popularity.

In Q3 alone, Google Cloud's revenue rose by an impressive 35% from the previous year, marking an acceleration from 29% growth in Q2 and 28% in Q1. As this division continues to expand and achieve operational efficiency, it will have a significant positive impact on Alphabet's overall financial health, marking it as one of its most critical business areas.

Given the uncertainty surrounding the DOJ investigation, investors can currently acquire Alphabet shares at a relatively attractive valuation. Trading at approximately 24 times forward earnings, Alphabet stands as a more budget-friendly option compared to many of its peers in the tech industry.

When comparing Alphabet to other companies in the "Magnificent Seven" tech group, it becomes clear that Alphabet is the most reasonably priced. For instance, Apple trades at a forward P/E of 34, Nvidia at 47, Microsoft also at 34, and Amazon at 45. In contrast, Alphabet's forward P/E is notably lower at 24.

This comparative analysis suggests that despite Alphabet's ongoing challenges, it is performing comparably well, if not better, than some of its competitors.

In summary, the bullish outlook for Alphabet seems to outweigh the bearish concerns. Investors would do well to consider purchasing shares in Alphabet, especially given the potential for strong performance in 2025, bolstered by the robust growth in its AI and cloud businesses, even as the DOJ investigation looms on the horizon.

investment, risk, growth