Alphabet’s Valuation Struggles Despite Strong Growth in AI and Other Sectors
Currently, the lowest-valued stock in the “Magnificent Seven” is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), and the difference is significant. Alphabet even trades below the overall market valuation, which is unexpected given the company’s history of innovation and success.
The rise of artificial intelligence chatbots is a key focus for investors, raising questions about Alphabet’s core Search business. However, Alphabet is not only working to maintain the relevance of Search but also has three other major business segments growing rapidly.
Future Earnings Outlook for Alphabet
In five years, Alphabet’s earnings are projected to be more balanced, encompassing a robust Search business along with three other major segments poised for growth.
Image source: Getty Images.
Navigating AI’s Impact on Search
Investor concerns about AI’s impact on Alphabet are understandable. Historically, Alphabet’s monopoly on Search has provided substantial profits, with consistent double-digit growth. However, with a substantial revenue run-rate of $200 billion, questions arise regarding how much further Search can expand, especially with rivals like ChatGPT and others emerging in the AI landscape.
Alphabet is bridging the gap in AI with rapid developments in large language models (LLMs). The recent rollout of its Gemini 2.5 model has garnered positive feedback, with some analysts comparing it favorably to the current industry leader, ChatGPT 4.5. During a recent earnings call, CEO Sundar Pichai highlighted that “by many metrics, I think we have the best model out there now.”
Consumer Search Habits Remain Strong
Many investors might underestimate Google Search’s enduring advantages as consumers begin to use AI tools. Alphabet is enhancing the existing Search experience, still part of billions of users’ daily routines, by integrating stronger AI capabilities. Despite the increasing prominence of LLMs, Alphabet managed to grow its Search and Other segment by 13.1% in 2024.
One year ago, Google started implementing AI overviews, leveraging Gemini’s capabilities to provide summarized, enhanced Search results. Alphabet noted it monetizes these AI features at rates similar to traditional Search, indicating sustained revenue growth.
Additionally, Alphabet has initiated beta testing for a new feature called “AI mode,” which facilitates complex queries and follow-up questions. This new feature complements existing AI enhancements to Search, bolstered by the Gemini model. Research suggests that consumers still strongly prefer Google Search, aided by the platform’s established habit and reliance on ad-based revenue, which could help Alphabet maintain its competitive edge.
Emerging Revenue Streams Outside of Search
While Search continues to dominate Alphabet’s revenue, contributing 56% and an even larger share of profits, other segments are now starting to gain traction. In the coming years, three areas are expected to significantly influence revenue and profit: YouTube, Google Cloud, and Waymo.
YouTube has evolved into the leading online video platform and is increasingly penetrating traditional media markets through subscription and ad-supported models. Last year, ads on YouTube increased by 15%, and overall subscriptions grew by 16%.
Meanwhile, Google Cloud has emerged as a significant player in the cloud computing landscape. After a 31% revenue growth to $43.2 billion last year and operating profits of $6.1 billion, Google Cloud achieved profitability for the first time in Q1 2023. The operating margin improved rapidly, nearing 17.8%. This trajectory suggests considerable potential for margin expansion in the coming years.
Image source: Getty Images.
Waymo: A Potential Game-Changer
Lastly, Waymo represents another promising but currently unprofitable venture. However, 2024 was pivotal for the autonomous robotaxi service as it expanded services in Phoenix, San Francisco, and Los Angeles. Recent data indicates Waymo captured a 22% share of the ride-hailing market in San Francisco, rivaling Lyft just 15 months after launching.
By early 2025, Waymo was reportedly providing 200,000 paid rides weekly. Its recent expansion into Austin, Texas, in March proved successful, generating twice as many rides in the first month as the San Francisco launch did two years prior. While competition from other companies looking to enter the autonomous ride-hailing market exists, the growth potential for Waymo remains substantial.
# Waymo Leads Autonomous Taxi Market as Alphabet Expands Beyond Search
Waymo continues to solidify its position in the autonomous taxi market. As the first mover in this space, it has garnered significant trust among riders. The longer Waymo operates without incidents, the more likely it is that prospective riders will choose its services. Meanwhile, other autonomous driving start-ups are also vying for attention.
Although the field has been perceived as a risky experiment, market projections are promising. Research estimates suggest that the total market size for autonomous vehicles could reach between $370 billion and $450 billion by 2033, indicating a substantial opportunity for growth.
Waymo’s early leadership suggests it will capture a significant portion of this burgeoning market. If successful, Alphabet will add Waymo as its fourth major division alongside Search, YouTube, and Cloud.
Alphabet’s Evolving Business Model
While Alphabet’s Search function faces increasing competition, it is expected to maintain strong profit generation in the coming years, despite a potential slowdown in growth. Alphabet’s current valuation may not fully account for these dynamics. Importantly, the role of Search may diminish over time as both Google Cloud and Waymo find their footing.
If Alphabet can sustain profitability in Search while the other divisions expand, its overall growth trajectory should remain positive. Such developments could present an attractive investment opportunity for shareholders today.
Is Investing in Alphabet Right for You?
Before considering an investment in Alphabet, it’s critical to evaluate the current landscape:
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Billy Duberstein and/or his clients hold positions in Alphabet. The Motley Fool recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
