Alphabet’s AI Gold Rush: How Google’s Parent Company Left Analysts Gobsmacked in Q1 2025
The quarter where Sundar Pichai mentioned “AI” 92 times and delivered a 49% surge in earnings
Disclaimer: I own shares in $GOOG and am quite fond of them, rather like one’s attachment to a reliable brolly on a rainy day. This essay represents my personal musings and should be treated with the same level of professional financial authority as advice from your neighbour’s cat. I write primarily to organise my own thoughts and investment thesis, a bit of mental tidying, if you will. Any investment decisions you make after reading this are entirely your own responsibility, and I cannot be held liable if your portfolio performs with all the grace of a penguin on rollerskates. Please consult a qualified financial advisor or do your own research (#DYOR) before making important decisions, not some random bloke on Substack who enjoys analysing tech companies over his morning cuppa.
Powered by AI, Fuelled by Dollars, Draped in Optimism
Alphabet’s Q1 2025 performance can best be described as "relentless optimism wrapped in cold hard cash." The AI strategy is firing on all cylinders, Google Services remains an absolute money-printer, and Google Cloud has finally graduated from promising student to full-fledged overachiever. Sure, massive AI infrastructure costs loom on the horizon, and regulators from Washington to Brussels are sharpening their swords. The Mountain View tech behemoth reported its Q1 2025 financial results on April 24th, revealing a performance that wasn’t just good. It was the sort that makes competitors nervously check their own forecasts. With revenue surging 12% year-over-year to $90.2 billion and profits skyrocketing 46% to $34.5 billion, it appears the company’s enormous bet on artificial intelligence is paying handsome dividends.
The Numbers That Made Wall Street’s Jaws Drop
Let’s start with the headline figures, Alphabet’s first quarter of 2025 served up a performance that could make even a stoic accountant crack a smile. Revenues rose a sprightly 12% year-on-year to $90.2 billion, up from $80.5 billion in Q1 2024. Operating income galloped ahead by 20% to $30.6 billion, while net income put on a positively theatrical display, surging 46% to $34.5 billion. Earnings per share (EPS) followed suit, ballooning 49% to $2.81 from $1.89 a year ago. If that doesn’t scream “success,” then perhaps the operating margin will: it stretched from 32% to a svelte 34%, proving Alphabet has mastered the art of XXXLing revenues on size-zero costs. And if you were wondering whether cash was still king, Alphabet now lounges atop a mighty $95 billion cash and marketable securities pile (a slight dip from $95.7 billion at year-end 2024, but still enough to fund a small country) , having generated a cool $36.2 billion in operating cash flow in just one quarter. Free cash flow, meanwhile, settled at $18.9 billion for the quarter, contributing to a trailing twelve-month haul of $74.9 billion. Not bad for a firm some pundits once dared to call “mature.” Mature, perhaps, but with the energy of a toddler on a sugar high. In a move that further cheered investors, the board approved a 5% increase to the quarterly dividend, bringing it to $0.21 per share, and authorised a massive $70 billion share repurchase programme. Alphabet’s shares jumped approximately 5% in after-hours trading following the announcement, reaching $169 positioning the company to open at its highest point in four weeks.
Google Services: The Jewel in the Crown
Google’s core business, Google Search that started it all continues to be the company’s primary cash printing machine. Google Services revenue increased 10% to $77.3 billion, driven by robust performance across multiple categories. Google Search & Other revenue grew 10% to $50.7 billion, showing remarkable resilience for a product that’s approaching its 27th birthday. Much of this growth appears to be driven by new AI-powered features. “AI Overviews” now has over 1.5 billion users per month, and the company recently launched “AI Mode,” an experimental feature that allows for more sophisticated search interactions. Intriguingly, queries with AI Mode are approximately twice as long as traditional search queries, suggesting users are engaging with the technology in fundamentally different ways. YouTube advertising revenue increased 10% to $8.9 billion, despite ongoing competition from TikTok and other short-form video platforms. YouTube celebrated its 20th anniversary during the quarter, and now boasts more than 20 billion videos on the platform (almost 3 videos for every person on this planet), with creators uploading an astonishing 20 million new videos every day. The subscription business is booming as well. Google surpassed 270 million paid subscriptions across its various services, with YouTube Music and Premium reaching over 125 million subscribers globally. The Google Subscriptions, Platforms, and Devices segment saw revenue increase by 19% to $10.4 billion. Operating income for Google Services increased 17% to $32.7 billion, with operating margin expanding from 39.6% to a hefty 42.3%. A staggering feat made all the more impressive in an environment where many tech companies are struggling to maintain margins.
Google Cloud: From 'Hopeful' to 'Profitable'
Google Cloud delivered a standout performance, with revenue increasing 28% to $12.3 billion. This growth was driven by Google Cloud Platform (GCP), particularly in the areas of core GCP products, AI infrastructure, and generative AI solutions. More impressive than the revenue growth, however, was the improvement in profitability. Operating income for the Cloud segment reached $2.2 billion, with operating margin expanding from 9.4% to 17.8%. This dramatic improvement in profitability suggests Google Cloud is finally achieving the economies of scale necessary to compete effectively with Amazon Web Services and Microsoft Azure. During the earnings call, CEO Sundar Pichai highlighted the company’s competitive advantages in cloud computing: “We provide leading cost, performance, and reliability for AI training and inference. This enables us to deliver the best value for AI leaders, like Anyscale and Contextual AI, as well as global brands like Verizon.” The Cloud segment faces some challenges going forward, however. The company noted that it’s operating in a “tight demand/supply environment,” meaning it’s struggling to keep up with customer demand. CFO Anat Ashkenazi explained, “Given that revenues are correlated with the timing of deployment of new capacity, we could see variability in Cloud revenue growth rates, depending on capacity deployment each quarter. We expect relatively higher capacity deployment towards the end of 2025.”
Other Bets: Waymo Accelerates, Literally
Other Bets, Alphabet’s collection of sci-fi dreams and commercial experiments, posted $450 million in revenue (down slightly) and a $1.2 billion operating loss (up from $1.0 billion). Most of that bonfire comes courtesy of Waymo, whose paid trips are up fivefold year-on-year now serving over a quarter million paid passenger trips weekly, but profitability still seems about as far off as a Waymo cab arriving in London. The company expanded its Waymo service to Silicon Valley during the quarter and broadened its partnership with Uber in Austin. It’s also preparing for a public launch in Atlanta later this summer, with Washington, D.C. and Miami on the horizon for 2026. After years of scepticism about whether Waymo would ever become a viable business, these figures suggest the company may be turning a corner. As Pichai noted, “We’ve been laser-focused, and we’ll continue to be, on building the world’s best driver. And I think doing that well really gives you a variety of optionality and business models across geographies.”
AI, AI, and Pich AI (Mentioned 92 Times! 150 times if you include PichAI)
If there was any doubt about Alphabet’s strategic focus, the earnings call should put that to rest. The word “AI” was mentioned a dizzying 92 times during the call, underscoring just how central artificial intelligence has become to the company’s plans. Pichai was particularly effusive about the company’s Gemini 2.5 AI model, which he described as “our most intelligent AI model, which is achieving breakthroughs in performance, and it’s widely recognized as the best model in the industry.” The company’s approach to AI is impressively comprehensive. They’re investing in everything from AI infrastructure (including custom TPUs and partnerships with NVIDIA) to foundational models (Gemini 2.5 Pro and Flash), to consumer products (AI Overviews, AI Mode) and enterprise solutions (Vertex AI Platform, Agent Development Kit). This “full-stack” approach to AI seems to be paying dividends. AI Overviews in Search has driven increased user engagement, AI-powered ad campaigns are delivering improved results for advertisers, and Google Cloud’s AI offerings are attracting significant customer demand. Google’s strategy involves three pillars: massive AI infrastructure investments, building the best frontier models (with Gemini 2.5 Flash and Imagen 3 name-dropped so frequently they deserve their own shareholder awards), and embedding AI deeply into products across the board. You can almost hear the unsaid mantra: "If it moves, we'll AI it."
Ambitious Investments: Spend it like Sundar
Looking ahead, Alphabet plans to maintain its aggressive investment posture despite potential economic headwinds. The company reaffirmed its plan to invest approximately $75 billion in capital expenditures during 2025, a significant increase from the $55 billion spent in 2024. These investments will primarily go toward technical infrastructure, with the largest component being servers followed by data centres. The increased CapEx will result in higher depreciation expenses throughout the year, potentially putting pressure on margins. The company also noted that its advertising business could face some challenges. Changes to the de minimis trade exemption will cause a “slight headwind” to its ads business in 2025, particularly affecting retailers based in the Asia-Pacific region. Additionally, the company will be lapping strong performance in the Financial Services vertical from 2024, which could impact year-over-year comparisons. Perhaps the most significant development for the future is Alphabet’s planned acquisition of Wiz, a cloud security platform, for $32 billion. The acquisition is expected to close in 2026, subject to regulatory approvals, and will strengthen Google Cloud’s cybersecurity offerings.
The AI Investment Thesis Validated
Alphabet’s Q1 2025 results offer a compelling validation of the company’s massive bet on AI. Despite investing heavily in AI research and infrastructure, the company has managed to deliver impressive growth in both revenue and profitability. The improvements in operating margin across all segments suggest that AI isn’t just driving top line growth it’s also creating operational efficiencies.
As the tech industry continues to grapple with how exactly to monetise AI, Alphabet appears to have found multiple avenues: enhancing core products like Search and YouTube, creating new subscription offerings, improving ad targeting and effectiveness, and building enterprise AI solutions through Google Cloud.
Final Thoughts: The “A” in Alphabet might as well stand for “AI”
With a solid balance sheet showing $95.3 billion in cash and marketable securities, continued strong free cash flow of $19 billion for the quarter, and a clear strategic vision centred on AI, Alphabet seems well-positioned to navigate whatever economic challenges 2025 might bring. If there’s one takeaway from these results, it’s that the “A” in Alphabet might as well stand for AI-it’s certainly what’s driving the company’s growth and, if this quarter is any indication, will continue to do so for the foreseeable future. Perhaps the only question remaining is whether Pichai can manage to mention AI more than 92 times on the next earnings call. Place your bets, ladies and gentlemen!
What will I watch out for?
So Q1-25 “Well played!” Alphabet has proved once again that it’s not just a tech giant, it’s a financial juggernaut with a penchant for artificial intelligence and a knack for keeping shareholders grinning. It has given investors every reason to keep the faith and perhaps to start practising saying “Gemini” in their sleep. After all, when your biggest problem is deciding what to do with nearly $100 billion in cash, you’re probably doing something right. While the momentum is undeniable, I’ll be watching closely for signs of margin pressure from soaring AI infrastructure costs, any softening in ad spend amid macro uncertainty, and whether Google Cloud can maintain its rapid profit expansion. Regulatory risks, particularly around antitrust remedies and the evolving European Digital Markets Act, also loom large. Most intriguingly, I’ll track whether Alphabet’s aggressive AI bets meaningfully drive new user behaviour or merely generate a lot of very clever demos.
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