An Alphabet Stock Deep Dive

0:20Travis Hoium:Welcome to Motley Fool Money. I am Travis Hoium joined today by Rachel Warren and Lou Whiteman. And we have a big event today going on this week for Motley Fool One members. So we're recording this a little bit early, but I still get to get together with Rachel and Lou to talk today a little bit about Alphabet. This is one of those companies that just seems to get bigger and more powerful by the year. So we're going to go through some of their biggest businesses. And then at the end of the show, in the last segment, we're going to talk a little bit about what the future of this company might look like.

0:50Travis Hoium:Some hidden gems that might be hidden on the balance sheet. But Lou, I wanted to start with their core business. And what we're going to talk about as the core is search and others, the way that they report it, the network revenue. It's the one segment that's in decline. And then what they call subscription platform and devices. This includes Android and all kinds of other stuff involved in there. But this is really the business that we thought was potentially going to be disrupted by things like ChatGPT. Well, that didn't happen. searches now growing double digits in 2025. I think we'll probably expect about the same in 2026.

1:26Travis Hoium:Subscription platform and devices grew over 20%. I mentioned that network business is in decline a little bit, but that's more structural the way that the internet has changed. So when you think about this core for Alphabet, where is this business going in the future?

1:42Lou Whiteman:So it's stable and whether or not the growth is sustainable, I don't know, but I think the goal is, and the special about Alphabet, what's unique about Alphabet is, is that stable is good enough. I mean, I am talking about the whole thing put together here because search, is search stable? I don't know. Search is evolving, but I've seen enough to conclude that Gemini can at least prevent that from being a total collapse. So I'm not worried about it. I don't know what the net is after, but even if search goes down, Gemini goes up. Stable is good enough here because Alphabet is set up with this unique structure where we have this cash cow and then we are going to invest in growth elsewhere.

2:23Lou Whiteman:The flywheel is healthier now than it has ever been. If they get growth from this core business, all the better. We're not going to discount that as investors. We like that. But what's important is that we can fund these other bets, these side projects that can turn into something. And those other bets have never looked more mature and more stable. It used to be a frat house, and now it is actually a collection of businesses. So the bottom line here is that the core business growth there is sort of the icing on the cake. The thing is, is just can it sustain? And the answer is a solid yes.

3:00Travis Hoium:Rachel, do you think that's right? This is, we'll talk about some of the growth segments and some of the maybe potentially even more difficult to disrupt. But this is 302, the segments I talked about,$302 billion worth of revenue. in the last year alone, this just seems like one of those businesses that even when you get to this size, you seem to run into the large numbers and Alphabet just never seems to. You know, it's funny because I think so many of the companies that we see throwing money at AI, there is not a cohesive strategy. And, you know, nothing could be further from what we're seeing with Alphabet, which the foundation of its business is arguably the most successful advertising engine in history, right?

3:40This is a very stable business, like Lou said. But it's worth noting, I mean, the growth continues to accelerate. You know, their annual revenue surpassed$400 billion for the first time, right? Search revenue alone hit$63 billion in a single quarter in Q4. And I think the really important thing is obviously this core of the business, the search business, the big fear has been, okay, well, now that we have all of these amazing AI tools, that's going to completely cannibalize traditional search. But I think what we are seeing and what we continue to see is that those AI-driven features that they're incorporating, you know, driven by Gemini.

4:14A lot of these other tools they're rolling out are actually increasing user engagement. It's keeping people on the platform longer for much more complex queries. It's opening up higher value ad inventory, which is really key, you know, for the advertisers on Google. And even with the rise of, you know, chat, GPT, perplexity, Google's search volume remains at historic highs. And this is because I think of a variety of reasons, one of which this habit of quote-unquote Googling, right? It's highly ingrained in our global culture. And so I think that that has created a really exceptional foundation as they move into this next era of growth.

4:50I do think it's fair to argue that they are starting to transition from more of a high margin software only model towards a more capital heavy infrastructure model. I know we'll talk about that a bit more in the next segment. But I think that this is the next part of the growth story for Alphabet. I like where it's going. And I think compared to a lot of the other tech businesses we see that are throwing money at AI, not sure where it's going to stick, we're seeing a really, really well-defined strategy.

5:17Travis Hoium:Lou, when we look at Alphabet, one of the things that strikes me is the sentiment has changed around the company so much over the past 12 months. A lot of that is really related to search and how they're folding in artificial intelligence. When you look at a company like this, and we'll talk about some of the other value that's hiding on the balance sheet, but SOC is now trading for 30 times earnings, but revenue is growing double digits. Is this the kind of business that in a world of AI, AI can be a sustaining innovation for them and even potentially a growth driver in these core segments? What we know from Google, the old Google, is this going to be something where I always think of my wife as an example.

5:56Travis Hoium:She's using AI mode in search, but is not using ChatGPT or Anthropic. Is that going to be more people than not in the future? and Google is just still going to be this massive winner a decade from now?

6:10Lou Whiteman:So I'm going to change the question a bit, but I bet I think you're onto something here. Is that, yeah, I mean, whichever consumer product people use, yeah, I think they will use Gemini, but whether that matters at the end of the day, who knows. But for all the attention on the hyperscalers, and yes, Google Alphabet is one of the hyperscalers, I think the value in AI isn't necessarily going to go to the hyperscalers. it's going to be with the subtle refinements in a trillion different business processes that can come out of AI. I think the real benefit of AI for Alphabet is exactly what you're saying, just the tiny little changes or the things that can either get more efficient, more sticky, better in all of these core businesses we're talking about.

6:55Lou Whiteman:They still have a ways to go. The autocomplete in Gmail is kind of ridiculous right now, so we're in early stages. But just a trillion different things like that, getting that right and just infusing AI in. I think that is the path and not just spend a quadrillion dollars as a hyperscaler. And no one is better than them at that. Microsoft's the only one that really even sniffs that. All right.

7:21Travis Hoium:Final question, Lou. When you look back on Alphabet's history, there's been a lot of throwing spaghetti at the wall. And we talked about that with companies like OpenAI. When you look at some of this big spaghetti they've thrown at the wall are moves like building chrome buying and building out the ecosystem for android you have things like maps is this going to ultimately be the moat that makes this an enduring business not just that search bar but all the stuff they've built around it so again i go

7:49Lou Whiteman:back to beginning i think the core that they have created and yes they created it by just trying different things they were a search company that decided to do email you know but i you know i i think we get it but but that has created just this core that generates the cash needed for them to try new things and so yeah i think i mean you know how whatever alphabet looks like in 10 or 20 years i think that the foundation that they have built is right up there with so was that accidental

8:17Travis Hoium:though or was that intentional this is what's always so interesting to me with alphabet is they seem to be in this perfect position today it's it's just both is that hey we threw so many things at the wall. And if we built this unintended mode around ourselves in a world of AI, cool.

8:32Lou Whiteman:I think they intentionally tried a lot of things knowing this is the old Silicon Valley cliche. They weren't afraid to fail. They went out and said, we are going to try a lot of things knowing full well, only some of them are going to stick. So I think it was intentional, the attempt, but I doubt they could have predicted exactly how it turned out.

8:52Travis Hoium:When we come back, we're going to talk about, I think maybe the biggest hidden gem, that's YouTube. You're listening to Motley Fool Money. It's spring cleaning season and this year we decided it was time to clear out our old mattress and settle into a Legend Hybrid from Lisa. Like a lot of parents, getting a good night's sleep is critical for being refreshed when the chaos begins in the morning. And in the month, I've been sleeping on the Lisa Legend Hybrid. I've fallen asleep faster and I'm sleeping deeper, which means I wake up more refreshed. We like the Lisa mattress because it's made in the USA.

9:20Travis Hoium:It ships with 120 night sleep trial, but after using the Lisa sleep quiz to find our perfect match, we couldn't be happier. This isn't just about sleep. Lisa is making a positive impact on the community with over 43 ,000 mattresses donated to local nonprofits to date and eco-friendly materials and manufacturing processes. To find out what Lisa mattress is right for you and take the sleep quiz, go to Lisa.com and you can get 20 % off of their spring sale. plus take an extra$50 off with the promo code FOOL exclusively for our listeners. That's L-E-E-S-A dot com promo code FOOL for 20 % off plus an extra$50 off.

9:58Travis Hoium:Support our show and let them know we sent you after checkout. That's Lisa.com promo code FOOL. Welcome back to Motley Fool Money with the Hidden Gems team. Rachel, one of the fascinating businesses under Alphabet is YouTube. This was, I thought it was a crazy acquisition when they made it, a little over a billion dollars. Maybe the best acquisition in the history of technology up there with Instagram, Facebook buying Instagram. But over the past year, they've generated over$40 billion worth of ad revenue. We know that that does not include, they don't report kind of the specific numbers for YouTube.

10:33Travis Hoium:This is something I think a lot of us wish they would with operating income is things like that. But you add in the prescription, the subscriptions premium, if you pay for that, it's over$50 billion in revenue. We know that probably more like 60 billion in revenue. This is a business that's now bigger than Netflix, uh, has more viewing time than Netflix, even on TVs. It's the biggest streaming service in the world. Is this, this just seems like a hidden gem sitting under YouTube and in or under alphabet. And it's got the backing of the biggest ad network in the world. Yeah. I mean, that's absolutely right.

11:09It's funny because I think even now when people hear streaming, they think, they think Netflix, They think Disney Plus. But the reality is that YouTube has become, very quietly, the undisputed leader here. It's the number one streaming service. It accounts for, according to Nielsen, more than 10 % of all TV viewing beating out every other paid platform. So you're talking about a platform that has effectively replaced traditional cable for an entire generation or series of generations at this point.

11:37Travis Hoium:And if you have kids, you know that. It's true, right? And it's such a combination. You've got like a 24-7 global newsroom, music service, men's library of educational and entertainment content, podcasts, all under one roof on this one cohesive platform. And from an investment perspective, YouTube is really this ultimate high-margin growth engine because the users on YouTube are really the ones doing the heavy lifting. You've got Netflix that spends about$20 billion a year on original content just to keep people from unsubscribing, right? YouTube's inventory is created by millions of creators, and then Google only pays them out once the ad revenue hits a certain point and actually rolls in.

12:18It's a genius model, low risk for Alphabet, infinite scale, very, very sticky. You noted those numbers at the beginning, probably about$60 billion or more combined in subscriptions and ad revenue from YouTube. So much growth there. I think it's just very clear that this is a platform that is part of the modern media landscape and continues to play a more pivotal role in viewership.

12:41Lou Whiteman:So I don't want to be the bear here because it's a great business, but maybe splash a little cold water on that. Is it a genius model? It's a different model. Yes, that they they're also one that seems to be harder to copy.

12:53Travis Hoium:I mean, you know, Disney Plus, Paramount can sort of copy what Netflix is doing. None of them are going to be able to do. I don't know.

12:59Lou Whiteman:I mean, TikTok is better at it at Gen Z right now. Now, the thing is, is that a lot of it is garbage. It's just a different model, right? Yes, they pay less, but it's lower value content. I don't know what to make of the... I think the YouTube Netflix comparison only really matters to people like us. They're just kind of different businesses, okay? And they're going after different things. One is, yeah, a lot more expensive to create, but I think has the ability to charge a premium. The other one has got to rely on advertising on a lot of the user-based content. That's the beauty of it and the flaw.

13:38Lou Whiteman:Here's the thing, though. I'm glad we brought up the cable thing because I think about this a lot. Netflix, as long as Netflix can produce quality, I think there is a place in my life for Netflix. But as we get to a future where fewer and fewer people have cable, where some of these traditional networks go away, I feel like that the cable replacement isn't necessary either one day that it'll just be... Right now, my Roku is just a series of apps. One of the apps is YouTube TV that gets me those old world TV channels. As those go away, do we really need YouTube TV? You know, and if so... No, we just need YouTube.

14:20Travis Hoium:I think that's the point. It's not about YouTube TV. It's the platform, the whole platform, Luke.

14:23Lou Whiteman:Well, we're right, but a lot of the revenue right now is coming in through YouTube TV. Advertising sustained businesses are difficult, okay? And, you know, it's just the world is changing. They have a place. Netflix has a place. Who has more, depending on what's your metric? That's not really important. But here's the thing. I'm not a big fan of this business, or I'm not, like, just gaga about this business, but I respect Alphabet's ability to evolve with the market, and I suspect it'll still be a contributor over time. And that's what counts.

14:55Travis Hoium:All right. If Alphabet wants to disclose how much revenue comes from YouTube proper, how much comes from YouTube TV, we can finish this argument. But if you have comments about whether you love YouTube or not, leave them in the show notes, leave them for Lou. All right. Let's move on to Google Cloud. This is the one that's gotten the most attention over the past few years from investors. The numbers here are crazy. So a few years ago, it was actually the March 2023 quarter was the first time that Google Cloud made an operating profit. So it was not making an operating profit until then. In the most recent quarter, Google Cloud grew 48 % to$17.7 billion worth of revenue and had an operating margin that nearly doubled from a year ago to 30.1%.

15:45Travis Hoium:Rachel, this seems to be, if you're looking for growth under Alphabet, this is it. It's not a majority of revenue yet, but man, it could be in five or 10 years, it seems like. Yeah. I mean, this is becoming an increasingly important growth engine for Alphabet's business. Incredible$240 billion backlog that surged, I think, more than 50 % recently, a lot of that's driven by enterprises desperate for AI infrastructure. And I think the real potential here for Google Cloud is the transition, you know, from hosting data to being really the AI factory for the world's biggest companies. As we're seeing a lot of businesses move past that experimental phase of AI, they need the massive scale that really these big tech companies can only provide.

16:27For Alphabet, you know, it's about those very high margin AI services that maybe could make cloud as profitable as search. You know, it's interesting to see with the chip wars and their custom TPUs, the place that they could play within this fight. I mean, obviously, NVIDIA's GPUs are the industry gold standard, but Google's the only cloud provider that has really successfully built its own top-tier AI silicon. So I do think this gives them something of a vertical integration advantage that's potentially going to be really hard to beat. You know, it avoids the so-called NVIDIA tax. They can offer those AI services at lower prices than competitors.

17:01Not about putting, you know, NVIDIA out of business, but it's really about creating, I think, for Alphabet and Google a walled garden where they can run the world's most powerful models cheaper and more efficiently. And that's something I'm really bullish on.

17:13Travis Hoium:Yeah, Lou, it does seem like they've kind of used price as a weapon in the market to gain market share. And the fascinating thing is they seem to have lower prices for serving AI models and they have a pretty darn good margin at this point. Yeah.

17:26Lou Whiteman:Yeah. As I said earlier, the Gemini versus Claude versus, you know, chat chief, that, that bores me. I think that that's, you know, that we'll see where that goes, but I do see the importance of AI, even if I don't know of having the winning model really matters. And they are the undisputed utility of AI, whether, ever it is, whether it's capacity, whether it's chips, whether all these things, and look, they don't even have to be the best at this. I don't think it matters if NVIDIA chips are better than alphabets or if alphabets are better than NVIDIA's. NVIDIA is all about the chips. As long as they can have, even if they have the second best offering in so many different areas of AI, they are going to win here, period.

18:13Lou Whiteman:And that's, I think, what matters. And we can debate which AI is better, which chip is better, any of those. At the end of the day, they're going to sell these things. They're going to sell it. And that is their advantage. They're not just one part of this system. They are everywhere.

18:27Travis Hoium:Who would have thought that in the early 2000s, when they were buying up data centers on the cheap and dark fiber, that would ultimately be one of the huge advantages in artificial intelligence. Taking those microseconds out of searches now means they're serving artificial intelligence faster than most of their competitors right now. When we come back, we're going to get to some of the other hidden gems in Alphabet's portfolio. You're listening to Motley Fool Money.

18:51Lou Whiteman:If you're serious about your trading, you know that the platform you use can be just as important as the strategies you execute. That's why I want to tell you about TastyTrade. TastyTrade is a powerhouse platform where you can trade stocks, options, futures, crypto, and more, all in one place. It's built for traders who want total control over their portfolio without being weighed down by high costs. They offer low commissions, including zero commission on stocks and crypto, so you actually keep more of what you earn. But it's not just about the price. It's about the tools. The platform is packed with advanced charting tools and backtesting to vet your ideas, a pre-built strategy selector and risk analysis tools to help you trade smarter.

19:29Lou Whiteman:And for advanced traders, there's active trader mode and one-click trading for fast order entry. If you ever run into a snag, you can get live stellar support from their trade desk reps during trading hours. And if you're looking to level up your knowledge, TastyTrade provides dozens of free educational courses right in your account. Whether you're an active trader, a long-term investor, or planning for retirement, Tasty Trade has the account type to fit your goals. Visit tastytrade.com to start your trading journey. Tasty Trade Inc. is a registered broker-dealer and member of FINRA, NFA, NSIPC.