Google is a global leader in search, digital advertising, cloud computing, and AI, with a business model built on scale, data, and technological innovation. From its dominant position in online search and YouTube to its rapidly growing Google Cloud division, the company has established itself as a key player across multiple industries. With continuous investments in AI, infrastructure, and digital services, Google is positioning itself for long-term growth. The question remains: Should this tech giant have a place in your portfolio?
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Google (Alphabet). I do own shares in some of their competitors, such as Microsoft. If you would like to view or copy my portfolio, you can do so here. Despite owning shares in some of their competitors, I will ensure that the analysis remains unbiased. If you want to purchase shares or fractional shares of Google, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
Google, founded in 1998, is a global technology company specializing in internet-related services and products. Its business is divided into three main segments: Google Services, Google Cloud, and Other Bets. Google Services accounts for the majority of the company’s revenue, contributing approximately 88,7 percent. This segment includes advertising, Search, YouTube, Android, Chrome, Google Play, Gmail, Google Maps, and hardware. Advertising, mainly through Google Search and YouTube, accounts for about 87 percent of Google Services revenue, with the rest coming from subscriptions and device sales. Google Cloud makes up around 12 percent of the company’s revenue and includes Google Cloud Platform and Google Workspace, offering AI-driven solutions, infrastructure, and productivity tools to businesses. Other Bets, contributing about 1 percent of revenue, consist of emerging ventures such as Waymo’s autonomous driving technology, Wing’s drone delivery service, and various research initiatives. Google’s competitive advantage is deeply rooted in its dominance in search and video and its advertising ecosystem. With a global market share of 89,8 percent in search, Google Search serves as the primary gateway to online information. YouTube, the second-most visited website in the world, is a dominant platform for digital entertainment and creator-driven content. Google’s vast data ecosystem enhances ad targeting precision, making its advertising platform indispensable to businesses. The scale and integration of Google’s ecosystem further reinforce its competitive position. Android is the world’s most widely used mobile operating system, while Chrome remains the most popular web browser. Google Workspace, which includes Gmail, Docs, and Drive, is a leading suite of productivity tools. These products are deeply interconnected, fostering user engagement and retention across multiple services. Google’s vast infrastructure also plays a key role in its competitive strength. The company operates some of the most advanced data centers globally, enabling fast, scalable, and cost-efficient services. Artificial intelligence is embedded across Google’s products, enhancing Search, YouTube recommendations, and enterprise cloud solutions. The company continues to refine its AI models, such as Gemini, to improve user experience and drive innovation. Beyond its core business, Google invests in long-term innovation through its Other Bets segment. The company explores emerging technologies such as autonomous driving, quantum computing, and AI-powered assistants, which could drive future growth. Waymo, for example, is at the forefront of fully autonomous ride-hailing services, while DeepMind’s AI research has led to breakthroughs in scientific computing. Google’s dominance in search and advertising, combined with its extensive infrastructure and integrated ecosystem, creates a large moat that ensures its leadership in an increasingly digital world.
Management
Sundar Pichai serves as the CEO of Google and its parent company, Alphabet. He first joined Google in 2004 as a product manager and rose through the ranks, eventually becoming CEO in 2015. In 2019, he was also appointed CEO of Alphabet, taking on broader responsibilities across the company’s various businesses. Born and raised in India, Sundar Pichai holds a degree in metallurgical engineering from the Indian Institute of Technology (IIT) Kharagpur. He later earned a Master of Science in materials science and engineering from Stanford University and an MBA from the Wharton School of the University of Pennsylvania. His background in engineering and business has played a significant role in shaping his leadership approach, emphasizing both technical innovation and operational efficiency. During his early years at Google, he was instrumental in the development and success of key products, including Google Chrome, Google Drive, Gmail, and Google Maps. His leadership in these areas helped Google expand its ecosystem and strengthen its dominance in web and mobile applications. As a product manager, he was widely respected for his ability to recruit, mentor, and retain top talent while effectively navigating internal company dynamics. Colleagues have described him as a leader who listens carefully, allows diverse opinions to surface, and then makes decisive, well-informed choices. Sundar Pichai’s reputation extends beyond Google. He was reportedly considered for the role of Microsoft’s CEO before Satya Nadella was appointed and was also approached for a top position at Twitter. Within Google, his leadership has been well-regarded, with employee reviews ranking him in the top 5% of CEOs among companies with more than 10.000 employees on Comparably. Despite his strong track record, he has faced challenges, including criticism for Google’s delayed response to ChatGPT and broader AI competition. However, under his leadership, Google has accelerated its AI initiatives, launching the Gemini AI models and integrating AI more deeply into Search, YouTube, and Google Cloud. Given his ability to lead large-scale operations, adapt to industry shifts, and drive product innovation, I believe Sundar Pichai remains well-equipped to guide Google into the future.
The Numbers
The first number we will look into is the return on invested capital, also known as ROIC. We require a 10-year history where all figures exceed 10% each year. Google has consistently achieved a solid return on invested capital over the past decade, with only one year falling below the requirement. However, this is not a concern, especially considering that Google has improved its ROIC since 2018 compared to pre-2017 levels. Since 2021, Google has maintained a ROIC above 20%, and it is encouraging to see that the company achieved its highest ROIC ever in 2024, which bodes well for the future. Management has highlighted that over the past three years, the proportion of capital spending on inference versus training has increased. Shifting more investment towards inference enhances ROIC because inference generates direct revenue by powering AI-driven products and services, whereas training involves high upfront costs with uncertain returns. This strategic shift suggests that Google is well-positioned to sustain consistently high ROIC moving forward.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Google has consistently grown its equity by more than 10% annually, except in 2017 and 2022. In 2017, growth was only slightly below that threshold, while 2022 was a challenging year for most companies, making it particularly encouraging that Google still managed to grow its equity, even if at a lower rate than usual. In 2023, Google returned to its typical double-digit equity growth, followed by its highest year-over-year increase of the past decade in 2024.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Google consistently generates a significant amount of free cash flow year after year. There was a slight decrease from 2016 to 2018, but this is not a cause for concern, especially considering that Google has achieved a higher level of free cash flow since 2019. Given that 2022 was a challenging year for most companies, the slight decline in free cash flow during that period is not worrisome. More importantly, Google set a new record for free cash flow in 2023 and surpassed it again in 2024, despite a significant increase in capital expenditures. Management expects another substantial increase in capital expenditures in 2025 as they continue investing in technical infrastructure, such as servers and data centers, to support growth across Google Services, Google Cloud, and Google DeepMind. As a result, we may see some impact on free cash flow in the short term. The levered free cash flow margin declined in 2024 due to these increased capital expenditures, and with further spending expected in 2025, it may continue to be affected in the near term. However, once Google begins to reap the benefits of these investments, the levered free cash flow margin should improve. Currently, the free cash flow yield is at its lowest level since 2020, suggesting that Google is trading at a higher valuation than it has in recent years. However, we will revisit valuation later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. This is assessed by dividing total long-term debt by earnings. For Google, this calculation shows a debt level of just 0,11 times its annual earnings, which is excellent. In fact, Google has not had a debt-to-earnings ratio above one at any point in the past 20 years, suggesting that debt is unlikely to become an issue for the company.
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Risks
Antitrust and regulatory risks pose a significant challenge to Google due to its dominant position in search, advertising, and mobile operating systems. Because of its size and influence, Google is under constant scrutiny from regulators in both the U.S. and Europe, facing multiple lawsuits and investigations into its business practices. One of the biggest concerns is the U.S. Department of Justice’s antitrust lawsuit, which recently ruled that Google used unfair practices to maintain its dominance in search and search advertising. The next phase of the case will determine what changes Google must make to comply with the ruling. This could mean Google will no longer be allowed to pay companies like Apple to make Google the default search engine on their devices. If that happens, more people might start using other search engines instead, potentially weakening Google’s position in the market. Another major lawsuit involves Google Play and its Android app store policies, with a California jury ruling that Google engaged in anti-competitive behavior. If upheld, the ruling could force Google to change how it operates its Play Store, reducing its control over app distribution and in-app payment systems - both of which are key sources of revenue. Google’s advertising business, which generates the majority of its revenue, is also under threat from regulatory scrutiny. Several lawsuits accuse Google of monopolistic behavior in digital advertising, which could lead to restrictions on how the company operates its ad technology. The European Union has historically been aggressive in regulating Google, imposing multi-billion-dollar fines over anti-competitive practices in search, Android, and digital advertising. The EU’s Digital Markets Act further limits Google’s ability to favor its own services, potentially affecting search rankings, data collection, and advertising strategies. One of the most extreme proposals under discussion is the potential forced sale of Google Chrome to reduce Google’s control over search distribution. Since Chrome plays a key role in directing users to Google Search, such a move could significantly weaken its search dominance and advertising reach.
Competition is a significant risk for Google because the technology industry is constantly evolving, with new products, services, and innovations emerging at a rapid pace. Google operates across multiple sectors, including search, advertising, cloud computing, AI, and digital content, where it faces competition from both established companies and emerging players. One of the biggest competitive threats comes from advancements in AI, particularly with the rise of generative AI tools like ChatGPT. While Google is heavily investing in AI, it remains uncertain how AI-driven search alternatives could impact its core search business, which is the company's largest revenue driver. If competitors' AI models become more effective at answering user queries directly, fewer people might rely on Google Search, potentially reducing advertising revenue. In digital advertising, Google competes with social media platforms like Facebook, TikTok, and Snapchat, as well as e-commerce giants like Amazon, which attract advertisers looking to reach consumers directly. As advertising spending shifts and new targeting strategies emerge, Google must continue adapting to maintain its dominant position. In mobile and app distribution, Google’s Android operating system competes with Apple’s iOS, while its Google Play Store faces increasing pressure from alternative app marketplaces. Cloud computing is another highly competitive space, where Google Cloud competes with Amazon Web Services (AWS) and Microsoft Azure, both of which have larger market shares. To grow in this sector, Google must continue investing in AI-powered cloud services, infrastructure, and customer acquisition while differentiating itself from rivals. New and emerging competitors can also disrupt Google by developing faster, cheaper, or more innovative solutions. The company must continuously invest in research and development to stay ahead, but if it misjudges market trends or fails to innovate effectively, it risks losing users, advertisers, and revenue to competitors. Additionally, companies with strong ecosystems - such as Apple, Amazon, and Microsoft - can leverage their platforms and devices to direct users away from Google’s services.
Macroeconomic conditions present a significant risk for Google because the company relies heavily on advertising revenue, which tends to fluctuate with the overall economy. In 2024, more than 75% of Google’s total revenue came from online advertising. When economic conditions deteriorate - such as during a recession or periods of slow economic growth - companies often cut back on marketing and advertising expenses to reduce costs. Since Google’s business model is built on connecting advertisers with users, any widespread reduction in ad spending could directly impact its financial performance. A prolonged economic downturn in key markets like the United States and Europe would likely lead to lower consumer spending, causing businesses to scale back their advertising budgets. This, in turn, would reduce demand for Google’s ad services, potentially slowing revenue growth and affecting profitability. The impact can be particularly severe for industries that are highly sensitive to economic conditions, such as retail, travel, and finance, which represent a substantial portion of Google’s advertisers. Beyond general economic slowdowns, changes in advertising trends and privacy regulations could also compound macroeconomic risks. With the increasing use of ad-blocking technologies, shifts in data privacy rules, and growing restrictions on targeted advertising - such as Google's own move to phase out third-party cookies - advertisers may find it harder to justify their spending on digital ads. If advertisers shift their budgets to alternative platforms or methods that they perceive as more effective, Google’s advertising revenue could decline further. Additionally, Google’s advertising partnerships are not locked in permanently. Many advertisers and content providers can terminate their contracts at any time, meaning that if economic conditions worsen or if they perceive Google’s ad services as less valuable compared to alternatives, they may choose to allocate their budgets elsewhere. This could create additional revenue volatility for Google, especially in uncertain economic periods.
Reasons to invest
YouTube is a compelling reason to invest in Google because it is not only the dominant video streaming platform but also a rapidly growing advertising, content, and e-commerce ecosystem. Several key factors reinforce YouTube’s strength and long-term potential as part of Google's broader business. Advertising remains YouTube’s primary revenue driver, and it continues to show strong growth. In 2024, YouTube's ad revenue increased significantly, with the U.S. election cycle nearly doubling advertising spend from 2020. This highlights YouTube's ability to capitalize on major political events. Additionally, strong contributions from the finance, retail, and tech sectors demonstrate that advertisers see YouTube as a crucial platform for reaching consumers. YouTube Shorts, its short-form video format, has become another major area of growth. In 2024, its monetization rate improved by more than 30 percentage points in the U.S., narrowing the gap with long-form videos. This progress indicates that YouTube is effectively competing with platforms like TikTok and Instagram Reels while successfully monetizing short-form content. Shorts is also expanding its presence on connected TVs, now accounting for 15% of Shorts viewing in the U.S., further increasing advertising opportunities. Beyond advertising, YouTube is diversifying its revenue streams through YouTube Shopping and the YouTube Partner Program. More than 250,000 creators are now part of the YouTube Shopping affiliate program, allowing them to monetize their content through product recommendations and direct sales. YouTube’s ability to integrate commerce into its platform positions it as a growing player in social commerce, an area expected to see strong growth in the coming years. Podcasts have also become a key area of expansion. With podcasts now integrated into the core YouTube experience, YouTube has become the most-used service for podcast consumption in the U.S., surpassing dedicated audio platforms. In 2024, viewers watched over 400 million hours of podcasts per month, reinforcing YouTube’s dominance in long-form content consumption.
Google Cloud is a strong reason to invest in Google because it is growing rapidly and becoming a more profitable part of the business. It provides essential computing power, storage, and digital services to businesses of all sizes, helping them run applications, store data, and improve operations. Many large companies have chosen Google Cloud to modernize their technology infrastructure, streamline workflows, and improve digital services for employees and customers. One of Google Cloud’s advantages is its ability to provide reliable and cost-effective computing power at a global scale. To support growing demand, Google is expanding its cloud infrastructure by building new data centers and improving internet connectivity through underwater cables. These investments ensure that Google Cloud remains a competitive choice for businesses that need high-speed and secure cloud services. Google has also focused on making its data centers more energy-efficient, allowing businesses to reduce costs while maintaining strong performance. Google Cloud has also become an important part of Google’s business because it generates steady revenue through long-term contracts with major companies. More businesses are signing large, multi-year agreements, showing confidence in Google Cloud’s ability to support their operations. Additionally, Google Cloud includes Google Workspace, which provides tools like Gmail, Google Drive, and Google Docs that are widely used in businesses and schools worldwide. As more companies move their operations online and rely on cloud computing, Google Cloud is well-positioned to benefit. Its ability to provide high-quality, secure, and scalable services makes it an attractive option for businesses looking to modernize and improve efficiency.
AI is a strong reason to invest in Google because it is deeply integrated into the company's core products and positioned as a long-term growth driver. Google’s AI strategy is built on three pillars: infrastructure, research, and products, all of which contribute to strengthening its market leadership and revenue opportunities. Google has built a strong foundation for AI, powering both its own services and helping businesses through Google Cloud. The company controls every aspect of its AI technology, from the physical equipment in data centers to the software that runs AI systems. This control allows Google to make AI more efficient and cost-effective, benefiting both its own operations and customers using its cloud computing services. Google’s research has led to more advanced AI models, such as Gemini, which continues to improve over time. AI is enhancing Google Search, making it faster and easier to use, especially for younger users who have quickly adopted new AI features. AI is also being integrated into other Google products, including YouTube, Android, and Google Workspace. The expansion of AI-powered tools, such as Gemini Live and Gemini Deep Research, gives users new ways to interact with AI. Since billions of people use Google’s products, AI is expected to make these services even more engaging and valuable over time. AI also offers future revenue opportunities for Google. While some AI tools are currently free or available through subscriptions, Google has a track record of introducing ads in ways that blend naturally into its services. Just as YouTube gradually built its ad business without disrupting the user experience, Google is likely to explore ways to integrate AI-powered ads and premium AI services into its ecosystem. As AI continues to evolve, Google is well-positioned to benefit from its advancements.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 8,04, which is from 2024. I have selected a projected future EPS growth rate of 15% (Finbox expects EPS to grow by 15,6% per year over the next five years. Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Google has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $241,20. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Google at a price of $120,60 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%. I calculate it as follows: The operating cash flow last year was 125.299, and the capital expenditures were 52.535. I attempted to analyze their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 36.775 in our calculations. The tax provision was 19.697. We have 12.211 outstanding shares. Hence, the calculation will be as follows: (125.299 – 36.775 + 19.697) / 12.211 x 10 = $88,63 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Google's free cash flow per share at $5,94 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $93,77.
Conclusion
I believe that Google is a great company that continues to hold a significant competitive advantage. I also have confidence in its management. Looking at the numbers since Sundar Pichai became CEO, it is clear that he has performed exceptionally well. In 2024, Google achieved its highest ROIC ever, and management expects this strong performance to continue. Despite a significant increase in capital expenditures, Google also delivered record-high free cash flow, though this did impact its levered free cash flow margin. However, Google does face risks. Antitrust and regulatory challenges could force changes to its business practices, potentially weakening its market dominance and affecting revenue. Competition, particularly in AI, is a concern, as models like ChatGPT could reduce reliance on Google Search and impact its core advertising revenue. If users shift to AI-driven search alternatives, Google may face declining market share and stronger competition across its businesses. Macroeconomic conditions also pose a risk, as advertising revenue, which makes up most of Google's income, tends to decline when businesses cut marketing budgets during economic downturns. YouTube remains one of Google's biggest strengths, maintaining its position as the dominant video streaming platform with strong advertising growth and expanding revenue streams. Its success in short-form video, connected TV, e-commerce, and podcasts further enhances its long-term potential. Google Cloud is another key growth driver, growing rapidly, becoming more profitable, and securing long-term contracts with major companies. Its expanding infrastructure, cost-effective computing power, and widely used services like Google Workspace position it well to benefit from the increasing demand for cloud computing. AI is also a major reason to invest in Google, as it enhances products like YouTube, Google Cloud, and Google Workspace while creating new revenue opportunities through advanced AI models and services. While I believe Google is a great company, I am concerned about how AI will disrupt search. Personally, I use Google Search less than ever, which raises questions about its long-term dominance. Because of this uncertainty, I will require at least a 20 percent discount on intrinsic value across all three valuation methods, meaning I believe Google will be a good investment at $141.
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