Deep Dive: Alphabet Inc. ($GOOG)

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Here’s an interesting thought experiment:

The most common question that I get on Rebound Investing is whether “X” company will ever go down in value, given its incredible moat and bullish investor outlook. Investors are worried about waiting for a pullback and missing the bus.

But data tells a different story.

In most cases, the drawdowns are not driven by dropping fundamentals but by investor sentiment.

The latest example of that was Google.

While the company is now trading at ATHs, just a few months back, the story was very different. Investors were worried that Google had lost the AI race, Sundar Pichai was an ineffective CEO, and ChatGPT would take away all of Google’s ad-search revenue.

Investors were worried despite Alphabet’s advertisement revenue and profits growing consistently.

We at Rebound Capital had been tracking Google since June, and all the rebound catalysts we predicted then have played out exactly as expected.

Even with the stock trading at an ATH, Alphabet is still undervalued based on my estimates.

I estimate that Alphabet is worth $300/share (25% upside).

Here’s my two-part deep-dive into Alphabet, where I cover its key business segments, the catalysts that led to its rebound, and its sum of parts valuation in part one, and a deep dive into how I valued different business segments in part two.

How Alphabet makes money

Below is a quick breakup of Alphabet’s revenue by segments in ’23 and ’24:

Search Business: Near monopoly with >90% share & >70% of Alphabet’s Profit

The search business is Alphabet’s main revenue driver, accounting for >55% of total revenues and >70% of total operating profits. It is a near-monopoly business with >90% market share in worldwide search.

YouTube (Ads): Market leader by number of hours viewed on a streaming platform

YouTube is a leading video platform, with over 2.7 billion monthly active users (MAUs). YouTube revenue through advertisements totalled $36B in 2024. YouTube Premium, its subscription service, now has over 100 million subscribers.

YouTube leads by total hours of content consumed in streaming services and now has more viewership than Netflix, a $528B company.

Google Cloud Services: Providing AI as a service to businesses and customers

GCP is Alphabet’s cloud service provider. It is at a >$50B/year annualized revenue run rate, post Q2’25 earnings. AI is a tailwind for GCP’s revenue and growth rate accelerated in Q2’25.

I expect GCP to reach $100B in revenue in the coming 3-5 years. Given its improving profitability and large scale in the coming years, GCP by itself is a $1 trillion asset.

GCP’s biggest advantage is that Alphabet has been working with Broadcom since 2016 to create its own semiconductor chips called TPUs. The TPUs give GCP a cost advantage versus other cloud providers, who are newer to building their own hardware (Google has been developing TPUs for 7 years, while other companies like MSFT & Meta have started 2-3 years ago).

Subscriptions, Platform & Devices: A growing $45B/year recurring revenue stream

Most subscription revenues are from the subscription of YouTube Music, Premium, TV, and Google One (cloud storage for Google Photos, Drive, Gmail, etc). YouTube and Google One have >200M paid subscribers as of April 2025.

An often-overlooked part of Alphabet’s ecosystem, this is an ~$45B recurring revenue stream. These services also increase customer stickiness and add to the overall Alphabet ecosystem.

Other Bets: Waymo

Waymo is the closest competitor to Tesla in the self-driving car market. Waymo was last valued at $45B in Oct’24 with Alphabet owning >75%.

Tesla is valued at ~$1,100B and I believe that the valuation gap between Waymo and Tesla will narrow as Waymo’s business model matures.

Why did Alphabet drop by 30%: History Does Not Repeat, But It Rhymes

These two headlines, separated by 11 years, both talk about Google’s search business being disrupted by an emerging new technology. In the early 2010s, the rise of mobile phones threatened Google’s desktop-first search ecosystem. Now, in 2025, Google faces investor scrutiny due to AI’s potential effects on the future of search.

Investor fears in early 2025 were eerily similar to worries during the mobile revolution in 2014:

The following catalysts led to the market rerating Alphabet stock:

1) Google I/O 2025 - Google showed its latest innovations in AI at its flagship event

Gemini updates included the release of two new models, Gemini 2.5 Pro and the faster Gemini 2.5 Flash, along with a new Deep Think feature for complex tasks. Gemini was integrated into Google Search with a new AI mode, and an experimental Agent Mode was released to perform multi-step tasks across apps. Additionally, new Creative Media AI tools like Veo 3 and Imagen 4 were released.

2) Management guided that search revenue and number of queries grew YoY

Google's Search and other revenue grew by 12% year-over-year to $54.2 billion, with CEO Sundar Pichai noting continued annual growth in both overall and commercial query volumes. The company reported that AI Overviews are driving a more than 10% increase in queries for the search types where they appear. Furthermore, the new AI Mode search experience has reached over 100 million monthly active users.

3) AI is increasing revenue paid per click due to better targeting of users

Many industry participants reported that using AI will likely lead to more targeted advertising, which could increase revenue per click and offset the potential drop in clicks caused by users visiting fewer sites.

4) Alphabet’s Antitrust case ruling avoided breaking up Alphabet

The court did not ask Alphabet to divest or sell Google Chrome browser or its Android Operating System. Also, Google can continue to pay to be Apple’s default search option.

Alphabet will dominate the AI ecosystem as it is the only company that controls all three pillars of the ecosystem:

1) Infrastructure (Hardware): Google makes its own semiconductor chips. This reduces its reliance and spend on Nvidia chips and enables them to serve customers at a lower cost.

2) The Brains (Foundation Models): Google’s Gemini model is consistently top-ranked in multiple benchmarks.

3) The Reach (Distribution and Development Platforms): Alphabet has unmatched reach to both consumers via the Gemini app and web traffic and to businesses through Google Cloud.

This chart aptly shows why Alphabet has a unique advantage which no other company can match.

Here’s Alphabet’s sum of parts valuation.

Sum of parts valuation is a method used to determine a company's total value by valuing each of its individual business segments separately. Adding the value of each part together provides an estimate of the company's total worth, which can then be compared to its market valuation to see if it is undervalued or overvalued.

I have projected each segment’s EBIT out to 2030 and then multiplied it by an EV/EBIT multiple to get each segment’s value in 2030. This gives us $4,675B as intrinsic value in 2030. I discount this to get its present value today and get $3,663B as the intrinsic value of Alphabet.

In per-share terms, Alphabet is worth $302/share. I will be sharing a detailed valuation analysis done for each segment in Part 2 of our Alphabet analysis.

Alphabet has significant capital investment risk due to capital expenditures made to set up data centres for Google Cloud services and for internal usage.

In the last 4 years Alphabet’s Capex has gone up ~3.4x from $25B in 2021 to $85B of Capex guidance in 2025. This massive spend is at risk of being unprofitable if Alphabet’s customers don't see a good return on their AI investments, or if Alphabet's AI offerings are less competitive in pricing or performance than those of its rivals, leading to underutilized infrastructure.

A key risk is that competitors like OpenAI and Perplexity could disrupt Google's search business by offering better ad targeting or by simply eroding its market share. If competitor LLM models are much better at providing contextual advertisements to end customers or if Alphabet’s user experience in AI search is not as seamless as that provided by competition, then Alphabet may lose significant market share in search.

Just as Alphabet successfully navigated the mobile revolution, I believe it is poised to dominate the upcoming AI revolution. With a current price of ~$240 per share, which is a 60% rebound from its lows, I anticipate it could still increase by another 25% to ~$300/share. Given its leadership in AI, I expect Alphabet to re-rate from the current ~25x PE ratio and trade closer to the PE multiples of its peers, like Microsoft's 36x and Amazon's 35x.

I will be sharing Part 2 of Alphabet’s analysis on Sunday. Here, I will deep dive into the Sum of Parts valuation analysis shared in this article. Upgrade your subscription to get the report.

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Rebound Capital’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research