Investment Review №348. Seasonal Rotation

About company

Alphabet (GOOGL) is one of the world’s largest technology holding companies, with core products and platforms including Google Search, YouTube, Android, Chrome, Gmail, Google Maps, Google Cloud, Gemini, and long-duration bets such as Waymo. The company controls consumer distribution, the advertising ecosystem, cloud infrastructure, AI models, and its own Tensor Processing Units (TPUs), making Alphabet one of the most vertically integrated players in the global AI race. The company’s key revenue lines are:

• Google Search & Other, 56% — Search advertising on Google Search, including traffic from search distribution partners that use Google.com as the default search experience, as well as advertising on Google-owned properties such as Gmail, Google Maps, and Google Play.
• YouTube Ads, 10% — YouTube advertising revenue, including both brand advertising and performance/direct-response advertising across YouTube properties.
• Google Network, 7% — Advertising revenue generated on Google Network partners’ sites and apps that participate in AdMob, AdSense, and Google Ad Manager.
• Google Subscriptions, Platforms & Devices, 12% — Consumer subscriptions, including YouTube TV, YouTube Music and Premium, and Google One with access to Google’s most capable Gemini models; platform revenue from Google Play app sales and in-app purchases; Pixel devices; and other products and services.
• Google Cloud, 15% — Google Cloud Platform, including infrastructure, platform, AI, cybersecurity, and data analytics solutions, as well as Google Workspace with Gmail, Docs, Calendar, Drive, Meet, and Gemini for Google Workspace.
• Other Bets, less than 1% — Alphabet’s long-duration bets, including Waymo.

 

 

 

Price dynamics GOOGL, $

 

Key Investment Theses

Alphabet is one of the key beneficiaries of the shift from traditional search to AI-powered search. Investors’ main concern had been that generative AI could disrupt Google’s search monopoly, but recent results point in the opposite direction: AI Overviews, AI Mode, and Gemini are expanding search use cases while supporting search monetization. In 1Q26, Search & Other revenue grew 19% year over year, marking the fourth consecutive quarter of acceleration despite competitive pressure from OpenAI and Anthropic. Google is embedding ads into AI-driven search, product discovery, and commerce journeys; in other words, search is not disappearing, but evolving from a list of links into a system that understands user intent.

Alphabet is rebuilding its advertising business around AI and deepening advertiser dependence on its platform. Google Marketing Live showed that advertising is moving away from manual management of keywords, bids, and formats toward automated campaign workflows in which the advertiser defines the objective while Google’s systems manage creative, audience selection, bidding, and measurement. This increases the value of Google’s closed-loop ecosystem: Google Search, YouTube, Merchant Center, Google Analytics, Performance Max, AI Max, Asset Studio, and Meridian are increasingly being integrated into a unified performance advertising system.

Google Cloud is becoming Alphabet’s second major value driver and is reshaping the company’s investment profile. In 1Q26, Google Cloud revenue grew 63% year over year, backlog nearly doubled to $462 billion, and Cloud operating margin reached 32.9%, pointing to improving unit economics in AI cloud infrastructure. According to company disclosures, more than 50% of backlog is expected to be recognized as revenue over the next 24 months, providing strong visibility into Cloud growth above 50% through 2027.

Rating on GOOGL: Buy; price target: $400. We recommend a stop-loss level of $300.