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If you’ve been following the tech industry lately, you’ll know that everyone has been pouring billions into artificial intelligence. But a question has been looming large: Will these massive investments ever pay off?
For Google’s parent company Alphabet, Thursday’s Q1 earnings report provides the first concrete evidence that the answer might be “yes.”
Let’s break down exactly what happened and why it matters.
The Numbers that Made Wall Street Cheer
Google parent Alphabet reported its Q1 2025 financials, and they were impressive by any standard:
- Revenue: $90.23 billion vs. $89.12 billion expected (12% year-over-year growth)
- Earnings per share: $2.81 vs. $2.01 expected
- Net income: $34.54 billion (up a whopping 46% from $23.66 billion a year earlier)
These results sent Alphabet’s stock soaring more than 5% in after-hours trading, adding approximately $75 billion to its market value in a matter of hours.
But wait—there’s a catch with that profit number.
The $8 Billion Paper Gain
A significant portion of Alphabet’s profit jump came from an $8 billion unrealized gain on nonmarketable equity securities related to Alphabet’s investment in a private company.
In plain English: Google owns shares in a non-public company that significantly increased in value, but Google hasn’t actually sold those shares yet. It’s like when your house value goes up, but you haven’t sold it—you’re “paper rich” but haven’t actually pocketed the cash.
If we exclude this one-time gain, Alphabet’s adjusted earnings were $2.27 per share—still comfortably above what analysts expected, but not quite as dramatic as the headline number suggests.
Search Business: Thriving Despite AI Competition
When ChatGPT burst onto the scene in late 2022, many predicted it would be the beginning of the end for Google Search. The theory was that if people could get answers directly from AI chatbots, they wouldn’t need to visit Google anymore.
But Google’s Q1 results tell a different story:
- “Search and other” revenue: $50.7 billion (up 9.8% year-over-year from $46.16 billion)
- Overall advertising revenue: $66.89 billion (up 8.5% from a year earlier)
- YouTube advertising: $8.93 billion (slightly below the $8.97 billion analysts expected)
Instead of cannibalizing Google’s search business, AI seems to be enhancing it. The company reported that AI Overviews—those AI-generated summaries that appear at the top of search results—now have 1.5 billion monthly users, up 50% from 1 billion in October.
In March, Google also launched an AI-only search mode, doubling down on its belief that AI will complement rather than replace traditional search.
The Industries Powering Google’s Ad Growth
Google’s business chief Philipp Schindler provided rare insight into which industries are spending most heavily on Google ads. Finance, retail, healthcare, and travel were among the top advertisers driving revenue growth.
This diversification is important—it means Google isn’t overly dependent on any single industry for its advertising revenue, which helps insulate it from sector-specific downturns.
Cloud Computing: Growing Fast and Getting More Profitable
Google Cloud has long been seen as playing catch-up to Amazon Web Services and Microsoft Azure. But its Q1 results show it’s making impressive progress:
- Revenue: $12.26 billion (up 28% year-over-year, though slightly below the $12.27 billion analysts expected)
- Operating margin: 17.8% (nearly doubled from 9.4% a year ago)
This dramatic improvement in profitability is significant—it suggests Google Cloud is achieving economies of scale and becoming more efficient as it grows. For investors wondering if Google’s massive infrastructure investments would ever pay off, this margin expansion provides a positive signal.
The Wiz Factor: Google’s Biggest Acquisition Ever
To further strengthen its cloud security offerings, Google made its largest acquisition ever in March, agreeing to buy cybersecurity firm Wiz for $32 billion in cash. That’s almost $10 billion more than it offered for the startup in 2024—a sign of how competitive the bidding may have been and how valuable Google views security capabilities.
“We think this will help spur more multicloud computing, something our customers want,” CEO Sundar Pichai said about the acquisition, which is expected to close next year subject to regulatory approvals.
This move signals Google’s determination to strengthen its position in the enterprise cloud market, where security concerns often determine which provider companies choose.
The Trump Tariff Effect on Digital Advertising
President Trump’s recent “Liberation Day” tariff plan—particularly his decision to end the de minimis trade exemption—could create headwinds for Google’s advertising business.
This exemption has allowed shipments worth less than $800 to enter the U.S. duty-free—a policy that’s been crucial for Chinese e-commerce companies like Temu and Shein, which have spent heavily on Google ads.
Schindler acknowledged this directly: “The changes to de minimis exemption will obviously cause a slight headwind to our ads business in 2025, primarily from APAC-based retailers.”
Industry data already shows these Chinese e-commerce websites are sharply cutting their U.S. digital ad spending, which could impact revenues at Google and Meta in coming quarters.
Google’s CFO was careful to note that the company has “a lot of experience in managing through uncertain times,” suggesting confidence in their ability to weather this challenge.
Traffic Acquisition Costs: The Price of Maintaining Dominance
Google paid $13.75 billion in traffic acquisition costs (TAC)—the money it pays to partners like Apple to remain the default search engine on their devices. This was slightly higher than the $13.66 billion analysts expected.
TAC is one of Google’s largest expenses and has been under scrutiny as the company faces antitrust challenges to these default search arrangements. Any forced changes to these deals could significantly impact Google’s business model.
The Moonshots: Still Burning Cash, But Making Progress
Alphabet’s “Other Bets” segment—home to experimental projects like self-driving car unit Waymo and life sciences unit Verily—continues to be a significant investment:
- Revenue: $450 million (down 9% from $495 million a year earlier)
- Operating loss: $1.23 billion (up from $1.02 billion the year prior)
Despite growing losses, there are signs of operational progress at Waymo, which is now providing more than 250,000 fully autonomous paid rides per week across San Francisco, Los Angeles, Phoenix, and Austin. That’s up from 200,000 in February, before the service opened in Austin and the broader San Francisco Bay area.
“Waymo is continuing to progress in building on its impressive technological achievements to scale rapidly and develop a sustainable business model,” said CFO Anat Ashkenazi.
This scaling of operations suggests Waymo may be getting closer to commercial viability, though profitability likely remains years away.
Capital Expenditures: Doubling Down on AI Infrastructure
Google spent $17.20 billion on capital expenditures in Q1—a 43% increase from the same period last year. The company reaffirmed its plans to invest approximately $75 billion in capital expenditures for the full year, though CFO Ashkenazi noted “the investment level may fluctuate from quarter to quarter due to the impact of changes in the timing of deliveries and construction schedules.”
This substantial infrastructure investment—primarily for AI data centers and related equipment—shows Google is not pulling back on its AI ambitions despite economic uncertainties. It’s a strong signal to competitors like Microsoft and Meta that Google is committed to maintaining its technological edge.
Returning Cash to Shareholders
Despite these massive investments, Google is also returning significant cash to shareholders:
- New share repurchase authorization: $70 billion (matching last year’s authorization)
- Dividend increase: 5% to $0.21 per share quarterly
With approximately $119 billion in cash and marketable securities on its balance sheet, Google clearly feels it can afford both its ambitious investment plans and generous shareholder returns.
The Regulatory Dark Cloud
While not directly addressed in the earnings report, Google faces significant regulatory challenges. Just last week, a U.S. federal judge found that Google holds an illegal monopoly over the online advertising market, which could eventually force reorganization of its ads business.
This follows last year’s ruling that Google’s search and ad businesses also violated antitrust laws. These legal setbacks create uncertainty about Google’s business model in the long term, though the immediate financial impact appears limited for now.
The Bottomline: AI Gamble Starting to Pay Off
Alphabet’s Q1 results provide the most compelling evidence yet that its massive AI investments are beginning to bear fruit across multiple business lines.
Three key narratives emerged from this earnings report:
- AI is enhancing rather than disrupting Google Search—contrary to early fears, AI features seem to be making Google’s core product more valuable, not less.
- Cloud profitability is improving dramatically—suggesting the economics of Google’s infrastructure investments are getting better as the business scales.
- Core business growth remains strong despite headwinds—even with new competitors and economic uncertainty, Google’s fundamental business model continues to deliver impressive results.
For investors and industry observers, the key takeaway is that Google appears to be successfully navigating the AI transition without disrupting its lucrative business model. The company has found ways to integrate AI enhancements while maintaining strong financial performance—no small feat given the magnitude of technology change underway.
However, challenges loom on the horizon: regulatory pressure is mounting, competition in AI continues to intensify, and economic headwinds from new tariff policies could impact advertising spending in coming quarters.
The next few quarters will be critical in determining whether Google can maintain this momentum as these pressures converge. But for now, the company has given investors reason to believe its massive AI bet isn’t just a costly experiment—it’s becoming a business reality that could power the next phase of Alphabet’s growth.
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