🔎 Google: Capex Arms Race
Antitrust looms while AI demand and search hold strong
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In case you missed it:
Alphabet (GOOG) is making its biggest bet yet on AI infrastructure.
The company plans to invest $75 billion in 2025—a 43% jump from last year—far exceeding expectations of $58 billion. This massive capex ramp will expand AI capacity, but it could also affect near-term free cash flow and margins.
Of course, Alphabet isn’t alone in this AI arms race. Microsoft is investing $80 billion in capex for its current fiscal year ending in June, while Meta is committing up to $65 billion in 2025. All are racing to build the infrastructure needed to support AI demand.
Despite regulatory scrutiny and intensifying competition, Alphabet CEO Sundar Pichai is playing the long game, scaling AI tools across its platforms while defending its dominance in search and advertising.
With the rise of open models like DeepSeek, is Gemini facing inevitable commoditization? And if so, does it even matter? If the real moat is distribution, Alphabet—with seven platforms reaching over 2 billion users—may still be the best-positioned company—alongside Meta—to dominate AI use cases.
Let’s visualize the quarter and dive into the latest report.
Today at a glance:
Alphabet Q4 FY24.
Antitrust, Cloud, and YouTube.
Key quotes from the earnings call.
Browser-based AI, Going Nuclear, and Waymo.
1. Alphabet Q4 FY24
Income statement:
Revenue grew +12% Y/Y to $96.5 billion ($0.2 billion miss).
🔎 Advertising: $72.5 billion (+11%, accelerating from +10% in Q3).
Search: $54.0 billion (+13%).
YouTube ads: $10.5 billion (+14%).
Network: $8.0 billion (-4%).
📱 Subscriptions, platforms, and devices: $11.6 billion (+8%).
☁️ Cloud: $11.6 billion (+30%, decelerating from +35% in Q3).
Margins:
Gross margin: 58% (+1pp Y/Y).
Operating margin: 32% (+5pp Y/Y).
Services (Advertising & Other): 39% (+4pp Y/Y).
Cloud: 18% (+8pp Y/Y).
Earnings per share (EPS): $2.15 ($0.02 beat).
Cash flow:
Operating cash flow YTD was $125 billion (+23% Y/Y).
Balance sheet:
Cash, cash equivalent, and marketable securities: $111 billion.
Long-term debt: $12 billion.
So what to make of all this?
Revenue growth decelerated to +12% Y/Y, down from last quarter’s 15%. Despite missing estimates for the first time in two years, Alphabet still saw strength in its two biggest ad channels:
Search accelerated to +13% Y/Y, boosted by financial services and retail.
YouTube accelerated to +14% Y/Y, benefiting from US election ads.
Network ads (which have a lower margin profile) declined (-4% Y/Y), reflecting ongoing competition and a tougher macro backdrop.
Subscriptions, platforms & devices rose +8% Y/Y, a sharp slowdown from last quarter’s +28% jump. The shift of the Pixel launch to Q3 (from Q4 last year) skewed the year-over-year comparison, partially offsetting subscription growth.
Cloud remained Alphabet’s fastest-growing segment at +30% Y/Y. It was a steep slowdown from +35% Y/Y in Q3 and fell short of expectations. Growth slowed after four consecutive quarters of acceleration. Why? First, Q4 last year saw a surge in AI deployments, creating a tough comparison. Second, AI demand outpaced supply, constraining growth and prompting the massive capex ramp for FY25. We’ll compare these results against AWS—stay tuned!
Margins got another boost: Operating margin jumped from 27% a year ago to 32% this quarter. This continued improvement points to ongoing cost discipline, particularly in headcount and facilities.
2. Antitrust, Cloud and YouTube
⚖️ Antitrust Challenges
Alphabet continues to navigate major legal challenges:
🔎 Search monopoly: The US Department of Justice proposed significant remedies after the August ruling that Google violated antitrust laws in search. Proposed measures include divesting the Chrome browser and potentially parts of Android to curb its dominance. A remedies trial is set for April 2025, with final decisions expected by August.
💻 Ad tech monopoly: In late November, the DOJ reiterated that Google monopolized online advertising through anti-competitive acquisitions and practices. A ruling is expected in the coming months, potentially leading to penalties or forced divestments, such as its ad exchange or publisher ad server.
🤖 Android Play Store monopoly: Earlier this week, Alphabet appealed a jury’s verdict that found its Play Store an illegal monopoly. The appeal challenges the December 2023 ruling requiring Android to allow alternative app stores and third-party payments. A decision is pending.
🌐 International scrutiny: In January, China launched an antitrust investigation focusing on Android’s dominance and its impact on Chinese smartphone makers. The move is widely seen as a response to US trade measures.
Caught between regulators and intensifying competition, Alphabet faces mounting pressure, and the outcomes of these cases could reshape its business.
☁️ Cloud: Capacity Constrained
Let’s unpack Cloud performance:
GCP + Workspace: Remember, Cloud includes GCP (Google Cloud Platform) and Workspace, making a direct comparison with AWS or Azure complicated. GCP is growing “much faster“ than the overall Cloud segment. Cloud exited the year capacity contained, so the slower growth does not indicate a slowdown in AI demand.
GenAI demand continues: The developer platform Vertex AI saw customers surge 5x Y/Y, and usage increased 20x in 2024. Over 4.4 million developers use Gemini models today.
Margin expansion: Cloud operating margin reached a new high of 18%. CFO Anat Ashkenazi attributed the recent gains to continued operational efficiencies. The improvement is also likely a direct result of AI demand outpacing supply.
▶️ YouTube: Shorts and Living Room lead the way
As a reminder, YouTube contributes to two segments:
YouTube ads: Advertising revenue generated on YouTube properties.
Subscriptions: YouTube TV, Music, Premium, NFL Sunday Ticket, and data storage. Subscription revenue is mixed with the Play store and Pixel sales.
Management revealed that Cloud and YouTube reached a combined annual run rate of $110 billion by the end of 2024, exceeding the $100 billion expected.
With Cloud’s run rate at $48 billion, this implies YouTube (ads + subscriptions) hit $62 billion—roughly 1.5x Netflix’s revenue. For context, YouTube ads alone accounted for 93% of Netflix’s 2024 revenue
Viewership growth: According to Nielsen, YouTube’s share of US TV time hit an all-time high of 11.1% in December 2024, up from 8.5% the previous year. YouTube has been the most-watched streaming platform on US TVs for 23 consecutive months, widening its lead as more viewers shift from linear TV to streaming.
YouTube Shorts are rapidly closing the monetization gap with long-form videos. In 2024, its ad revenue relative to traditional instream ads grew by over 30 percentage points in the US, with further gains expected in 2025. An unexpected shift? Connected TV now accounts for 15% of Shorts viewing, proving that even vertical video has a place on the big screen. YouTube creators earning most of their revenue from TV also grew over 30% Y/Y, highlighting the platform’s expanding role in premium content consumption.
3. Key quotes from the earnings call
CEO Sundar Pichai
On AI progress:
Pichai touched on the three layers of the AI tech stack at Alphabet:
⚙️ AI infrastructure: He highlighted the expansion of GCP’s network through 11 new regions and 7 subsea cable projects, with data centers now delivering 4x more compute per unit of electricity than five years ago. Cloud usage has surged 8x in the past 18 months, prompting continued investment in hardware, compilers, and overall efficiency.
🛠️ Research (models and tooling): Gemini 2.0—Alphabet’s most advanced AI model—headlined Pichai’s focus on research alongside agentic features like Deep Research and generative media models (Veo 2 for video, Imagen 3 for images).
📱 Product and platforms bringing AI to users: Google has integrated Gemini to power features like AI Overviews and Circle to Search. This boosts engagement and opens new types of queries, especially among younger users. Pichai sees 2025 as a watershed year for Search innovation, leveraging these AI advances at a massive global scale.
On YouTube:
“Our early investment in podcasts is paying off. We integrated podcasts into the core YouTube experience, particularly with video. We are now the most frequently used service for consuming podcasts in the US, according to a recent Edison report. This success reflects our long-term approach of investing in emerging trends, from mobile to the living room.”
This may surprise some readers, but YouTube is more used for podcasts than Apple Podcasts and Spotify. It illustrates the platform's rapid innovation and ability to accommodate new use cases. In short, YouTube can become Spotify faster than Spotify can become YouTube.
On Waymo:
“Waymo made tremendous progress last year, safely serving more than four million passenger trips. It’s now averaging over 150,000 trips each week and growing.
Looking ahead, Waymo will be expanding its network and operations partnerships to open up new markets, including Austin and Atlanta this year and Miami next year. And in the coming weeks, Waymo One vehicles will arrive in Tokyo for their first international road trip. We are also developing the sixth-generation Waymo driver, which will significantly lower hardware costs.”
Waymo’s path to scalability relies on reducing costs. The question is: Can Waymo overcome its hardware challenges faster than Tesla can solve its software challenges? Tesla plans to launch its robotaxi service in Austin this June. The service will initially use existing Tesla models before the Cybercab enters production (planned for 2026).
On Search:
“Search usage overall, our metrics are healthy. We are continuing to see growth in Search on a year-on-year basis in terms of overall usage. Of course, within that, AI Overviews has seen stronger growth, particularly across all segments of users, including in younger users. So it’s being well-received.”
AI overviews have increased engagement and can monetize approximately the same as the rest of Search, indicating a clear tailwind for the business if engagement continues to rise. So far, the dreaded AI headwinds due to cannibalization have proven wrong. While ChatGPT and Perplexity see rising adoption, Alphabet also benefits from an increasing interest in AI-based search.
On DeepSeek:
“Part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases, because the cost of actually using it is going to keep coming down, which will make more use cases feasible, and that’s the opportunity space. It’s as big as it comes, and that’s why you’re seeing us invest to meet that moment.”
Pichai sees a competitive advantage in full-stack development and end-to-end optimization. He said several Gemini models (2.0 Flash and Flash Thinking) already match DeepSeek’s V3 and R1 in efficiency.
Chief Business Officer Philipp Schindler
On AI and ad performance:
“We continue investing in AI capabilities across media buying, creative, and measurement.”
Alphabet is leveraging AI for asset creation, campaign optimization, and precise measurement. Advertising accounts for 75% of Alpahbet’s revenue. It has often been considered a potential weakness. But in a world where AI boosts every part of the marketing value chain, the performance tailwinds could more than offset the competitive headwinds.
CFO Anat Ashkenaz
On Cloud:
“Given that revenues are correlated with the timing of deployment of new capacity, we could see variability in Cloud revenue growth rates depending on when new capacity comes online during 2025. […] We exited the year with more demand than we had available capacity.”
Cloud growth will ebb and flow depending on supply in the coming quarters. This quarter’s slowdown is not an indication of waning AI demand.
4. What to watch looking forward
🤖 More AI announcements
With seven products and platforms reaching over 2 billion users, Alphabet remains well-positioned to monetize the top of the AI tech stack.
New breakthroughs from lower inference costs to more efficient chips.
AI-powered assistants browsing and shopping for you, like the rumored Project Jarvis.
AI-driven ad products fine-tuning Google Shopping or enhancing ad performance.
Multimodal models powering AI advancements, including Project Astra and Deep Research.
Pichai summed it up: “There’s a lot of unlock ahead.”
DeepSeek’s rise highlights how AI models are becoming more interchangeable. But for Alphabet, the real moat isn’t Gemini alone—it’s the seamless integration of AI across billions of users via Search, Android, YouTube, and Workspace. The biggest advantage in AI may not be the model itself but where and how it’s deployed.
⚛️ Quantum computing
Alphabet’s new quantum chip, Willow, marks a major leap in computing power. It solved a benchmark task in under five minutes—a feat that would take today’s fastest supercomputers 10 septillion years.
The breakthrough is crucial because it demonstrates quantum error correction, a key hurdle in making quantum computers viable. By reducing errors as qubits scale, Willow brings us a step closer to practical quantum computing.
Still, real-world applications are a long way off. Challenges like scaling qubits and maintaining stability mean commercial impact is years—if not decades—away.
But as Waymo has shown, Alphabet’s “other bets” can go from moonshots to billion-dollar businesses.
Stay tuned for more reviews of Big Tech earnings in the coming weeks.
That’s it for today!
Stay healthy and invest on!
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Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Disclosure: I am long AAPL, AMZN, GOOG, and NFLX in App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
Regarding this line “YouTube is more used for podcasts than Apple Podcasts and Spotify. It illustrates the platform's rapid innovation and ability to accommodate new use cases. In short, YouTube can become Spotify faster than Spotify can become YouTube” I genuinely don’t think YouTube and Spotify are playing in the same field and let it be a mistake if YouTube tries to go to play in Spotify’s field. The YouTube feed is chaotic and its recommendation algorithm the best of all (it has the Google engine behind, for sure). I do see it as YouTube playing on the field of getting the user engaged with the latest-quality content and Spotify king with everything to do with playlists, personalization, way more structured, predictable and organized, you know what you’ll encounter when you open Spotify, that’s sort of your space. Plus, one is king in video and the other one is king in audio. MIT classes or the highest quality educational content are only on YouTube, and those are often better understood if you watch them.
And YouTube can’t be everyone at once.
They aren’t one or the other. I personally see both subscriptions as different and they’ll remain better if they distinguish themselves as that.