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Alphabet (GOOG) released its first-quarter earnings yesterday, April 24, after the close of markets. The stock is trading higher today as the Google parent beat on both the top line and bottom line. In this article, we’ll examine the key takeaways from Alphabet’s Q1 report and whether the stock is still a buy.
Alphabet’s Q1 Earnings Were a Mixed Bag
Alphabet beat on the headline numbers, led by strong growth in search and advertisements. The company’s search business has shown a lot of resilience despite the looming threat from ChatGPT. Moreover, the core advertisement business held its ground in Q1 despite the tariff uncertainty.
However, the earnings were a mixed bag, and the growth in its YouTube and cloud segments was slightly below estimates. Google cloud revenues also trailed estimates in the previous quarter, which triggered a selloff in the stock following the Q4 2024 earnings release. YouTube ad revenues have also generally disappointed over the last several quarters, even though the premium subscription offering has been gaining traction. While Alphabet does not provide a revenue breakdown for premium YouTube subscriptions, during the Q1 earnings call, CEO Sundar Pichai said, “Subscriptions are now a big part of the business.”
How Would Trump’s Tariffs Impact Google?
Alphabet does not provide forward guidance, but the company provided some color on the impact of President Donald Trump’s tariffs, without actually mentioning the word “tariff” even once.
Google’s Chief Business Officer Philipp Schindler acknowledged that the company is “not immune to the macro environment.” He added, “We wouldn’t want to speculate about potential impacts beyond noting that the changes to the de minimis exemption will obviously cause a slight headwind to our ads business in 2025, primarily from APAC-based retailers.” Notably, Temu and Shein are among the big advertisers on Google and Meta Platforms (META), as Chinese companies capitalized on the de minimis rule that allowed for imports of goods valued below $800 without taxes.
The tariff uncertainty and the resultant slowdown in U.S. economic activity could also impact Google’s operations in the U.S. In response to an analyst’s question on whether brands advertising on YouTube are “starting to react to some of these macro jitters that we’re all experiencing,” Schindler responded by saying, “It’s too early to really comment on that.”
Google Faces Regulatory Scrutiny
Apart from rising competition from artificial intelligence (AI) companies, especially Microsoft-backed OpenAI (MSFT), Alphabet is also battling regulatory scrutiny. The U.S. Justice Department plans to break up Alphabet and force the company to divest the Chrome browser and Android operating system. It also wants the company to its end exclusive agreements with phone makers like Apple (AAPL) and Samsung.
During the earnings call, Alphabet’s regulatory woes were not discussed even as the company received yet another blow earlier this month when a federal judge ruled that it held an illegal monopoly in online advertising markets, making it the second antitrust ruling against the company in less than a year.
Should You Buy GOOG Stock Now?
While there remains considerable uncertainty around the antitrust cases, which have weighed heavily on GOOG shares over the last year, I believe Alphabet stock is a buy. The company has multiple growth levers that can drive its next leg of growth.
Firstly, Google has managed to shed the perception that it’s a laggard in the AI space. During the Q1 earnings call, Alphabet said that its AI overviews now have 1.5 billion monthly users. Secondly, the company is building a subscription business in both YouTube and the Google suite of products and now boasts 270 million subscribers.
YouTube happens to be an underappreciated asset in Alphabet’s arsenal, and even though its recent performance hasn’t exactly been stellar, it can drive significant long-term value. According to the company, YouTube has over 2 billion videos with another 20 million getting added every day on average. Citing Nielsen data, Google said that YouTube has been the leading streaming platform in the U.S. for the last two years.
Alphabet also has services like Waymo, which will add long-term value. While Tesla (TSLA) CEO Elon Musk mocked Waymo for its high-cost vehicles and boasted that Tesla could command a “99% market share or something ridiculous” in the U.S. robotaxi market, it wouldn’t be prudent to write off Waymo so soon.
Finally, GOOG trades at depressed valuations, and its forward price-earnings (P/E) multiple of 18.15x is not only the lowest among its “Magnificent 7” peers, but is also below what an average S&P 500 Index ($SPX) constituent trades at. Alphabet’s valuations are also trending below their historical averages, in part due to the regulatory uncertainty.
Overall, while Alphabet is currently facing multiple challenges – both inside and outside the courtrooms where newer entrants are threatening its dominance in the online search market – I find the stock attractive given its reasonable valuations.
Alphabet Stock Forecast
Of the 53 analysts covering GOOG, 41 have a “Strong Buy” rating while two rate the stock as a “Moderate Buy.” The remaining nine analysts rate Alphabet as a “Hold,” and its mean target price of $201 is almost 25% higher than the April 24 closing price.
