To The Moon

$Alphabet(GOOG)$

Alphabet is set to report its quarterly financial results after the market closes on February 4th, 2025. This has many investors wondering if they should buy Alphabet stock ahead of the earnings announcement. In this article, I’ll address that question and also highlight what investors should be looking for in Alphabet’s upcoming earnings release—key details that might be overlooked if you're just focusing on the headlines from major media outlets. Let's dive in!

Earning Overview

The last time Alphabet provided an update was on October 29th, when they shared their previous quarterly results. One major highlight was the Google Cloud segment, which competes with Amazon Web Services. This is where Alphabet generates a lot of its AI-related revenue. The Google Cloud segment saw a 35% increase in revenues, reaching $11.4 billion, driven by rapid growth in Google Cloud Platform, AI infrastructure, generative AI solutions, and core GCP products.

Fundamental Analysis

This segment is expected to grow the fastest overall for Alphabet and is critical for the broader stock market. If Google Cloud continues growing at a pace above 30% each quarter, it could signal great things for other companies in the AI ecosystem—like Nvidia, AMD, Microsoft, Amazon, and Oracle—since AI is one of the hottest trends right now with massive growth potential.

So, the biggest thing investors should watch for in Alphabet's earnings release is how well Google Cloud is performing. Alphabet’s CEO has mentioned that the company's commitment to AI and innovation is paying off, and customers and partners are benefiting from the company’s AI tools. These are the kinds of updates you want to hear from a company—positive, forward-looking news that reflects the success of their strategic investments.

Now, I've seen the opposite happen before, where companies make big investments but then struggle to deliver results. When that happens, management often blames external factors or makes excuses. But in Alphabet’s case, the news so far is encouraging. Their investments are clearly paying off, and that's the kind of outcome investors want to see.

Another key point is YouTube’s performance. Over the past year, YouTube’s total ad and subscription revenue has surpassed $50 billion. This is a sign of the growing success of streaming platforms, with the industry benefiting from economies of scale. As we've seen from Netflix’s quarterly results, streaming providers are reaching critical mass and generating significant profits.

YouTube is benefiting from this trend as well. The more people use YouTube, the more creators want to produce content. That creates a cycle where more content attracts more viewers, which in turn draws more creators. It’s a self-perpetuating growth loop. Personally, I think YouTube is the best streaming platform out there because it offers free access to a wide variety of content tailored to your interests. You’re very likely to find something you want to watch on YouTube, more so than on other platforms like Netflix.

To sum it up, Alphabet’s upcoming earnings report will likely highlight strong growth in Google Cloud and YouTube, which are both positioned well in the rapidly expanding AI and streaming markets. These areas are definitely worth keeping an eye on for anyone considering an investment in Alphabet stock.

I often find content I enjoy watching on YouTube, which highlights the potential for this segment to become one of Alphabet’s most valuable. This was evident in their latest quarterly update. Overall, the company saw accelerated revenue growth, increasing from 11% to 15% year-over-year. The company’s growth, as I’ve mentioned before, is driven by economies of scale. It’s not just one segment—every part of Alphabet benefits from this, and this is reflected in their operating margin, which expanded from 28% to 32%.

What I find truly impressive is how Alphabet has managed to build a multi-billion-dollar business primarily based on free products. Offering services like Gmail, Google Docs, YouTube, and Google Search for free, and still generating hundreds of billions in revenue, is no small feat. What's even more impressive is that they’ve been able to do this profitably.

Another key aspect to watch when Alphabet reports its results is the number of employees. I was pleased when they made significant job cuts in late 2022 and early 2023—thousands of jobs were cut. While no one celebrates people losing their jobs, from an investor’s perspective, it was important for Alphabet to get serious about controlling costs and avoid bloating their workforce. I want to see them continue to maintain cost discipline in the upcoming quarter, rather than becoming complacent after a couple of good quarters. They shouldn’t allow employee numbers to rise again just because things are going well. A couple of years ago, reports showed that Alphabet had some lavish perks, like dozens of massage therapists at their headquarters, and employees were receiving perks that went beyond what's considered normal. This kind of excess costs shareholders, so I’d like to see Alphabet stay disciplined and keep its focus on efficiency.

The last important thing to keep an eye on in Alphabet’s earnings report is the "purchases of property and equipment" line on the cash flow statement. This figure rose from $8 billion in the same quarter last year to $13 billion in the most recent quarter. Over the past nine months, Alphabet has spent $38 billion on property and equipment, nearly doubling the $21 billion spent last year. This increase in spending is largely related to investments in AI, data centers optimized for AI, and payments to Nvidia for GPUs and AI infrastructure. While many investors are focused on other metrics, I like to see this number increasing. Alphabet has a strong track record of making smart, profitable investments in capital, and as an investor, I’d like to see them continue to capitalize on opportunities that they’ve proven capable of managing well.

In fact, it’s similar to how I feel about Netflix. If Netflix is spending more on content, I’d support that because they’ve shown they know how to make content people want to watch. The same goes for Alphabet—they've demonstrated that they know how to invest wisely in these areas, and I want to see them do more of it when opportunities arise, especially given the size and scale of their business.

Valuation

Looking at Alphabet’s valuation, it’s currently trading at a forward PE of 23 which I consider still cheap for a company of its size, growth potential, and risk profile. The reason it’s priced this low is due to concerns about how large language models, like ChatGPT, may impact Google’s search business. This is the primary risk, and it’s why the stock is priced as it is. Even using my discounted cash flow model, I calculate the intrinsic value of Alphabet at $238 per share, while the current market price is around $200, indicating that the stock is undervalued.

Conclusion

So, should you buy the stock before or after earnings? In this case, I think the stock is undervalued enough that it’s worth considering before earnings. There are always risks, but the potential upside appears greater than the downside. If you’re unsure, you can always split your investment, but personally, I’d lean toward buying before the earnings report.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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