Disclosure: Jenga Investment Partners Ltd owns shares in Alphabet

Last month, I published a deep dive on Alphabet, which you can read here and the Alphabet valuation model here. At the heart of my long-term thesis, I made the following base-case assumptions for the next five years:

• 8.8% revenue growth for Google Search division

• 21% revenue growth for Google Cloud division

• 9.9% revenue growth for Alphabet as a group

• 12% EBIT growth for Alphabet overall

• Margin expansion from 32.6% to 36.1%

• At least $65 billion share repurchased in 2025

• Exit multiple of 23x by 2029

• Potential IRR 16.74% between March 2025 and March 2030

Since my deep dive, Alphabet’s stock is down 7.3%, trading at a 17.8x forward earnings multiple, modestly below my trajectory. But as always, short-term price movement is noise. What matters is execution — and last night, Alphabet kicked off the first of 20 quarters in this thesis period with its Q1 2025 results. Below, I compare Alphabet’s Q1 actuals against both market expectations and our long-term benchmarks.

From the table, Alphabet passed the Q1 2025 test by matching or beating my long-term and the market's fundamentals estimates. Search revenue came at 9.85%, above both the market and my forecast, proving Google still manages to create value for advertisers through its search functions and YouTube platform.

More interestingly, Google Cloud continued its gains by growing revenues by 28% while achieving operating margins of 17.76%, nearly double its Q1 2025 operating margin of 9.4%.

Alphabet reported a 45.9% increase in net income, driven by the unrealised investment gains — mainly its stake in SpaceX. While notable, I exclude these from the core thesis, focusing instead on the operating business.

Moving on to the more insightful comments from the earnings call, I will split these into three segments;

• Search and YouTube

• Cloud services

• Costs and capital allocation

Search and YouTube

Q1 2025 was a slow quarter for YouTube advertising, as it grew 10%, broadly in line with search, which is something I wouldn't expect given the smaller revenue base of YouTube and the existing scale of search. That said, YouTube had other bright spots beyond its advertising revenue. Sundar Pichai shared more insights on the progress YouTube is making beyond just advertising, which will be equally crucial in future years. There are currently 1 billion monthly active podcast users with 125 million YouTube music and premium subscribers (including trials), which shows the breadth of YouTube as an entertainment platform rather than just video content. Even within video content, there are now, on average, 20 million videos uploaded daily, roughly 7.3 billion videos per year. Talk about scale…

Although less profitable in the short term, I believe YouTube has to continually view itself as entertainment beyond just mobile video content to truly cement its moat relative to peers like social media and streaming apps, and I was pleased to hear in Pichai’s comments that in the US according to Nielsen, YouTube is mainly watched on TV, rather than mobile, once again highlighting how much YouTube continues to penetrate its viewers share relative to traditional TV.

Moving to search, the key theme here is how Alphabet's search engine competes and stays relevant in a world with ChatGPT, DeepSeek and other AI chatbots with search functionality. From an advertisers' lens, it's pleasing to see sectors like financial services, retail, and travel continue to find value with search and lead the divisions growth. During my deep dive into Alphabet, I highlighted that real-time data on travel and insurance are search query categories that traditional search can maintain a competitive advantage over chatbots, and both customer advertising segments are areas that could propel earnings growth for Google search beyond this quarter.

Another key area for search has been the integration of AI across its core search function and family of products. Management flagged that all 15 Alphabet products with more than 500 million users now use Gemini models. While this sounds impressive, earlier this week, Alphabet also shared that its core Gemini AI chatbot still lags behind ChatGPT with just 35 million daily active users (350 million monthly active users), around 20% of the estimated ChatGPT 160 million daily users. There’s clearly still a lot to catch up here.

Earlier last quarter, Google launched AI overviews, and Pichai shared there are 1.5 billion users per month, a figure I wouldn't read too closely into, but what I believe is more important is that AI overviews sees a similar level of monetisation as with search, which for me was a bigger worry if it cannibalises the core search page. I hope they share more insights on this alongside the newly launched AI mode feature launched in March.

Google Cloud

Google Cloud's performance was impressive in terms of both revenue growth and profitability. Google continues to invest in its own chips, TPUs, which is a key part of the cloud story and narrowing the value chain control gap to Amazon and Microsoft in the cloud market. There were some technological updates during the earnings call, such as the Vertex AI platform's continued growth with supporting customers like Lowe's to integrate AI across their business. Cloud today is currently 13.5% of Alphabet's total revenue, and I will be looking at its peer's quarterly results closely later next week, given the several reports shared recently on the cloud and data centre market slowdown. Finally, there was a minor update on the Wiz acquisition of $32 billion. To me, it seems like a defensive acquisition move by Alphabet to support its cybersecurity offerings across its cloud stack. 

Costs and capital allocation

The big worry from Q4 2024 earnings was the $75 billion Capex management guided for 2025, with markets reacting negatively to it with suggestions of Alphabet potentially over-investing. I'm still indifferent here because while this is a very large figure, the biggest risk Alphabet faces today is underinvesting in its AI capabilities with the flux of threats it sees daily. While this impacts its free cash flow and profitability for investors, I don't see any other way for Alphabet to survive these new threats and maintain its market share in search queries, advertising and making gains in the cloud market.

Overall, the Q1 earnings update is pretty good, and I have given it an internal score of 7.5/10, which is on track with my internal IRR hurdle. Some quarters will, of course, be positive, like Q1 2025, while some will fall short, but it's essential to watch how management responds to threats, allocates capital and continually invests in the ever-growing portfolio of solutions for society.

I have no changes to the Alphabet investment case and you can see my model for the next five years below.