Alphabet's Strong Core Business Supports Double-Digit Growth Amid Caution.

Alphabet has outperformed since it was announced as the only FAANG company to invest more in. The company has a strong core business, growing in double digits, and a diverse range of revenue streams. Despite its success, caution is warranted due to ongoing competition in the tech industry and regulatory scrutiny.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has demonstrated robust performance since it was identified as the only FAANG company to invest more in. The company's core business, Google, continues to grow at a double-digit rate, with revenue from the search and advertising division increasing by 12% year-over-year (YoY) [1]. Alphabet's strong financial results, including a 14% YoY revenue growth and a 19% net income growth, underscore its resilience in the competitive tech industry [1].

However, caution is warranted. Alphabet's massive capital expenditures (capex) are a significant concern. The company is ramping up its capex, spending over $30 billion in 2022 and guiding for more than $85 billion in 2025, primarily to invest in artificial intelligence (AI) and cloud services [1]. This substantial investment is expected to continue into 2026, with Alphabet's finance chief Anat Ashkenazi noting that the company expects to further increase capital expenditures [2]. While this spending is driven by strong demand for cloud products and services, it also raises questions about the sustainability of shareholder returns.

Alphabet's financial results for the second quarter of 2025 reflect its continued growth. Revenue increased by 14% YoY, exceeding Wall Street expectations, and net income rose by nearly 20% [2]. The company's cloud computing business, a significant driver of capex, saw a 32% YoY revenue growth [2]. However, the company's capital expenditures forecast for 2025 was increased by $10 billion, reflecting the growing demand for its cloud services [2].

The company's commitment to shareholder returns is evident through its modest dividend policy and a $70 billion share buyback program [1]. However, the sustainability of these initiatives depends on the company's free cash flow (FCF) after accounting for its capital expenditures. Alphabet's FCF yield dropped to less than 1% in the most recent quarter, indicating the impact of its heavy investment in AI and cloud services [1].

Alphabet's strong performance in the search and advertising sectors, along with its growing cloud business, is a testament to its business strength. However, the company's heavy investment in AI and cloud services, along with ongoing competition and regulatory scrutiny, poses risks to its future growth and shareholder returns. Investors should closely monitor Alphabet's capital expenditures and the impact on its FCF to assess the sustainability of its shareholder return initiatives.

References:
[1] https://seekingalpha.com/article/4804780-alphabet-still-undervalued-caution-warranted
[2] https://www.cnbc.com/2025/07/23/alphabet-google-q2-earnings.html