GOOG FY25 --Top 10 holding--Ontrack to be the worlds most valuable company?

 

GOOG FY25 RESULT—ON TRACK TO BE THE LARGEST COMPANY IN THE WORLD?

GOOG reported very strong numbers, with revenues and NPAT both being above my estimates. There were some accounting issues, PCP had charges that dropped out, as well as a $2.1B Waymo charge due to increased valuation (staff costs), offset by MTM gains of up to $3.2B. Nothing significant here, and the quality of the result in cash reconciliation was very good. ROE ended at a record 32%, 10Y ave 22%.

Overall, revenues were 15% higher, and EPS was 34% higher, big numbers. Segments on a year-on-year basis were positive. Search grow 13%, a slight reacceleration, YT up 12%, Networks were 2% lower and continue to be a less relevant part of the group. Subscriptions were 19% higher and reaccelerated, and cloud was 36% higher with a significant reacceleration. In terms of income, Google Services were 15% higher and Cloud 128% higher.

The two standouts here were the Cloud margin acceleration from 18% in the Q125 to 30% in 4Q25, quite staggering, strong top line, as well as operational growth. Since the bulk of GOOG's capex is headed in this direction, that is a promising outcome. Secondly, the search-dominated segment continues to hold margins, despite fears of disruption, a lack of monetisation and extra AI costs in the search function. The list of product enhancements in search has been impressive; the numbers indicate no problems with monetisation. Another promising outcome. Paid clicks and cost to click both up 6% and 7%, respectively, very strong. At this stage, Search looks like an AI winner, incredible.

Although search is holding up well and growing, there is a change in the mix of earnings occurring with GOOG. More cloud and more subscriptions. That can only be good news for the rating of earnings over time. It should be noted that YT revenues were disclosed as over $60B and are probably 40/20 advertising and subscriptions. As subscriptions grow, the move to more paid subs reduces advertising revenue, but it's better for the group's profits overall.

GOOG is the player with the most comprehensive AI full stack, and the ability to synchronise operations is a benefit (chips, DCs, LL models, applications). The advent of Gemini is also blending across many operations. GOOG disclosed that the Gemini app has over 750m MAU, as it gains share on Chat GPT. However, the Gemini AI features pervade much of Google's businesses. The amalgamation of Deep Mind and Google Brain and the closer co-operation of research and product is surprising to the upside. The amount and quality of Google products coming out are significant. The personal assistant remains a big goal, and GOOG let OpenAI get a head start here, as well as others. There is, however, movement at the station here with apparent plans to incorporate the data from Gmail, photos, search history and YT into a Gemini run assistant, that would have the ability to customise well above any other operator (with all apps having over a billion users). We shall see how that progresses. There was also a tie-up with AAPL announced. GOOG and AAPL have a long-standing relationship, and using Gemini for iPhone’s Siri will cement this further. The commercial terms would be interesting to see; at the very least, it embeds Gemini into the AAPL ecosystem. A Universal Commerce Protocol was reached for the ability of agents to search and purchase, with profit shares presumably agreed with various operators, e.g., SHOP.

Waymo continues to make progress, and the current valuation of $126B implies about $10/share in value for GOOG. If Waymo is more successful, the valuation could go much higher and be a driver for GOOG.

As was my base case, the regulatory issues appear to have largely moved behind GOOG.

GOOG spent some $91B on capex for 2025 and forecast $175-185B in 2026 (measured against a $132b NPAT for 2025). The issue here is that the market can clearly see various measures of ROIC declining, and in a significant manner. The returns that this capital spend generates will largely determine the investment case for GOOG.

Management, of course, can see incremental returns by capex vintage, and they continue to invest and are confident in future returns. The absolute size does bring some apprehension, as the capex profile is shown below with the 2026 midpoint. GOOG has consistently stated that demand has exceeded supply, and we can see improvements in Cloud margins. What is the ROI on this spend? That is the critical outcome, as traditional returns on capital for GOOG have been outstanding. Will it be lower? And how much lower? If we measure the returns as CFO on capital deployed two years ago, we get good returns. The capex guide increases the size of the prize but also the execution risk, and could test the ability of demand to grow to meet the extra capacity. That is the valuation challenge for GOOG. The past numbers are looking interesting. Can they be extrapolated to much larger capex spends? Since this is not a monopoly or duopoly, there is a chance of a significant loser in this race. For all the AI/Cloud companies, the stakes get larger. As we sit here now, GOOG looks to hold the best hand, due to its AI pedigree and full stack. The improvements in absolute profit dollars, assuming the capex is fruitful, are mind-boggling, and so the market scepticism is understandable.  

 

VALUATION and SUMMARY

The results are well above what could have reasonably been expected not that long ago.

The risk/return is certainly increasing for GOOG. Assuming a relatively successful outcome, which is my base case, at $331, assuming a 13% 5Y eps cagr and 24x exits multiple gives a 8% return, to generate a 10% return would require a $300 SP.

GOOG is a large position, and I am holding it at this stage. Risks would be evidence of poor ROIC outcomes on marginal capex, possibly from a long list of reasons, delays in use cases and applications for the slow-moving large body of potential clients, perhaps the most likely.

mix improving, broad gains

                                     

GOOG productivity improves post Chat GPT moment.

This chart combines the increasing capex with current cashflows. The strain is clear now. What will the reward be? Generating historic ROIC implies large NPAt increases.