• In 2020, the U.S. Department of Justice (DOJ) filed an antitrust lawsuit against GOOGL over its monopoly in Search markets. In 2024, GOOGL was held liable for maintaining a monopoly in search services and text advertising through exclusionary conduct.
• U.S. District Judge ruled that no divestment of Chrome and Android but imposed restrictions on exclusive agreements and required search index and user-interaction data sharing.
• We view the overall ruling positively and believe restrictions on exclusivity have limited impacts on GOOGL given product strength and partner incentives. We downgraded to ACCUMULATE rating but increased DCF target price to US$265 due to recent price rally. We keep our FY25e revenue unchanged, but reduce WACC from 7.7% to 7.4%, reflect the ease of investors' sentiment over the case decision. We expect GOOGL to continue benefitting from AI-driven product enhancement and operational efficiencies.

· 2Q25 revenue and PATMI were within our expectations, with revenue up 14% YoY to US$96.4bn and PATMI increased 19% YoY to US$28.2bn. 1H25 revenue/PATMI were at 47%/44% of our FY25e forecasts. 

· Strong revenue growth across all core business segments as a result of 1) resilient search ads growth (12% YoY) and increasing YouTube monetisation, 2) Cloud acceleration (32% YoY), and 3) ongoing efforts on cost efficiency. 

·  We maintain a BUY rating with a reduced DCF target price of US$235 (previously US$250) due to short-term valuation pressure on higher CAPEX, but increase FY25e revenue by 3.5%, reflecting strength in the ad and subscription business with improved cloud service delivery. We expect GOOGL to continue benefitting from AI-driven product enhancement and operational efficiencies, boosting Cloud capacity and strengthening ad targeting capabilities. In addition, we view the current share price as attractive, trading at a discount with a P/E ratio of 20.5x, which is below its 5-year historical average of ~25x. 

• GOOGL’s cloud business leads performance despite supply constraints, aiming for ~US$75bn in CAPEX for FY25e to boost AI-related investment.
• Management’s effort on cost efficiency provides potential upside to the margin.
• We maintain a BUY with a raised target price of US$250 (prev.US$240), but reduce FY25e revenue by 2% due to the short-term impact of tariffs on the ads business. Our WACC increased to 7.7% from 7.3%, and the terminal growth rate assumption remains unchanged at 5% to reflect GOOGL’s ability in cost re-engineering and long-term revenue generation from Cloud.

• 3Q24 revenue was slightly above due to higher Cloud demand; PATMI was also higher due to greater Cloud profitability and continued focus on cost efficiencies. 9M24 revenue/PATMI were at 73%/77% of our FY24e forecasts.
• +35% YoY Cloud growth was the main driver of total revenue; Cloud operating margin (OM) also increased 6% points sequentially to 17% due to larger scale, contributing ~2% points of GOOGL’s 4.5% point YoY OM expansion.
• We keep our FY24e revenue unchanged but increase PATMI by 5% due to improving efficiencies, lowered costs, and higher profitability from Cloud. We raise our terminal growth rate assumption to 5% (prev. 4.5%) to reflect higher long-term revenue from Cloud, and raise our DCF target price to US$240 (prev. US$205). We maintain a BUY. We are optimistic about GOOGL’s ability to deliver almost instant ROI on its AI investments.

• 2Q24 revenue was within expectations, but PATMI was above due to higher operating leverage. 1H24 revenue/PATMI were at 48%/51% of our FY24e forecasts.
• Advertising is still resilient with 11% YoY growth, while Cloud growth accelerated (29% YoY) thanks to AI offerings. Operating margin expanded 310bps YoY to 32.4% due to lower OPEX growth and increased AI-driven operational efficiencies, surpassing pandemic peak.
• We keep our FY24e revenue unchanged but increase PATMI by 4% because of GOOGL’s continued focus on reducing costs. We upgrade to a BUY from ACCUMULATE with a raised DCF target price of US$205 (prev. US$195). Our WACC/growth rate assumptions remain unchanged at 7.3%/4.5%. GOOGL is still the dominant player in digital advertising and the market leader in AI. It is also currently trading at what we view as attractive valuations – 18x FY25e earnings, below its 10-yr average of 22x.

• 1Q24 revenue was within expectations, but PATMI was above due to higher operating leverage. 1Q24 revenue/PATMI were at 23%/27% of our FY24e forecasts.
• Growth on both top (15% YoY) and bottom lines (57% YoY) as a result of: 1) resilient Search ad growth (13% YoY) and increasing YouTube monetisation, 2) Cloud acceleration (28% YoY), and 3) continued focus on cost optimisations.
• We raise our FY24e PATMI by 8% as a result of GOOGL’s continued focus on near-term margin expansion while also increasing FY24e CAPEX by ~US$10bn to account for higher AI infrastructure investments. We maintain ACCUMULATE with a raised DCF target price of US$195 (prev. US$154). Our WACC remains unchanged at 7.3%, while we increase our terminal growth rate assumption to 4.5% (prev. 3.5%). We expect GOOGL to benefit from AI-related product improvements and efficiencies, which will help drive advertising dollars while also being well-positioned to capture more eyeballs through increasing user time spent on connected TV.

The Positives

+ Search is still strong, and YouTube is seeing a quick acceleration in growth. Search advertising growth remained resilient at 14% YoY, driven by strength from Chinese retailers, which began in 2Q23. YouTube ad revenue saw a significant reacceleration to 21% YoY (4Q23: 16% YoY) as a result of higher user engagement on the platform, particularly in Shorts. YouTube ad revenue was driven by both strengths in direct response and brand advertising, with Shorts monetisation continuing to improve (monetisation rate >2x YoY).

+ Cloud remains the fastest growing segment, benefitting from AI offerings. Cloud growth accelerated to 28% YoY (4Q23: 26% YoY) as it remained GOOGL’s fastest-growing segment. Growth was supported by an increase in average revenue per seat, reflecting stronger demand for GOOGL’s cloud infrastructure and Generative AI solutions. Cloud’s 2^nd quarter of accelerating growth indicates a resumption in customer spending likely due to continued migration to the Cloud and AI-related offerings – which was also seen from GOOGL’s key competitors Amazon’s AWS and Microsoft’s Azure.

+ Margins continue to expand due to ongoing efficiency efforts. GOOGL’s ongoing cost optimisation efforts continue to pay off – leaner organisational structure and improved product prioritization, with its 1Q24 operating margin of 31.6%, a 670bps increase YoY (+400bps YoY excl. restructuring and severance related charges), and is almost back to pandemic highs of 32.3%. GOOGL also reiterated its focus on moderating expense growth and its commitment to expanding margins, even in the face of higher AI-related investments. Headcount was down -5%/-1% YoY/QoQ. We raise our FY24e PATMI by 8% on higher operating leverage and cost efficiencies.

The Negative

- Higher CAPEX is a headwind to valuations. GOOGL’s 1Q24 CAPEX almost doubled to US$12bn as the company increased its investments in AI-related infrastructure like servers and data centres to support future AI development. GOOGL also mentioned that it would sustain this level of spending through the rest of FY24e. As a result, we increase our FY24e/FY25e CAPEX by ~25% YoY each to account for the higher levels of investments.

• 4Q23 results were within expectations. FY23 revenue/PATMI were at 100%/98% of our FY23e forecasts. 4Q23 PATMI grew 52% YoY on higher operating leverage.
• Advertising is still on the rebound, with 11% YoY growth improving sequentially for a 4^th straight quarter. APAC retail strength was the standout again. FY24e CAPEX levels are expected to be significantly higher vs FY23 as GOOGL continues to scale its technical infrastructure to support AI development.
• We cut our FY24e PATMI by ~5% as a result of increasing R&D investments in AI. Due to recent price action, we downgrade to ACCUMULATE from BUY, but raise our DCF target price to US$154 (prev. US$144) as we roll-over an additional year of valuations, with an unchanged WACC of 7.3% and terminal growth rate of 3.5%. We expect GOOGL to remain the market leader in digital advertising by leveraging AI for product improvements and efficiencies, while also being well positioned to capture more eyeballs through YouTube and connected TV.

The Positives

+ Advertising continued to rebound; growth improved sequentially. Ad revenue in 4Q23 improved sequentially vs 3Q23 (9% YoY) to US$65.5bn (11% YoY), driven largely by Search (+13% YoY) and YouTube Ads (16% YoY). Retail strength in APAC was the standout, with small and medium businesses GOOGL’s fastest-growing channel. AI technology in products like Performance Max and Search Generative Experience continues to also drive higher conversions per dollar for advertisers, and incremental query growth from consumers. We expect AI to continue driving most of the gains in advertising by creating: 1) increasing ROI and value for advertisers; and 2) wider accessibility for customers like SMBs.

+ Monetisation on YouTube improving, with subscription momentum gaining traction. Continuing on from previous quarters, Shorts monetisation has been progressing well as viewership expands. Shorts currently has ~2bn MAUs and ~70bn average daily views. YouTube Music and Premium subscriptions are also scaling well, with an annualised run rate of US$15bn. The first season of NFL Sunday Ticket was the key driver for subscription growth. Although still a very small portion of its business, we anticipate ~20-25% YoY subscription growth in FY24e given the growing user base of YouTube on connected TV.

The Negative

- Significantly increasing FY24e CAPEX for servers and data centres to support AI work. GOOGL ended 4Q23 with US$11bn in CAPEX, a 45% YoY increase. It also expects “notably larger” levels of CAPEX in FY24e as it remains focused on developing its technical infrastructure (servers and data centres) to support AI development. We are modeling for a ~20% YoY increase in CAPEX for FY24e vs our previous estimates of ~6% YoY.

• 2Q23 results were within expectations. 1H23 revenue/PATMI were at 47%/46% of our FY23e forecasts. Earnings growth re-accelerated to 15% YoY after 5 quarters of decline.
• Advertising looks to have bottomed, Ad revenue expanded 3% YoY – first time after 2 consecutive quarters of declines, driven by stronger retail trends.
• Cloud still showing healthy growth of 28% YoY with ramp in both seats and average revenue per seat. Extensive customer interest in AI-related products like Bard/Duet AI.
• We raise our FY23e PATMI by 4%, and our FY24e revenue/PATMI by 3%/9% on greater AI-driven efficiencies and a quicker-than-anticipated recovery in advertising. We maintain BUY with a raised DCF target price of US$144.00 (prev. US$131.00), with a WACC of 7.3% and terminal growth of 3.5%.

The Positives

+ Advertising looks to have bottomed. GOOGL showed some signs of recovery in its advertising business, with US$58bn in ad revenue expanding 3% YoY after 2 consecutive quarters of contractions. Within advertising, Search revenue re-accelerated slightly to 5% YoY (1Q23: 2% YoY) on the back of better retail advertising trends, with revenue from YouTube also accelerating to 4% YoY (1Q23: -3% YoY) after 3 quarters of negative growth – indicating that at the very least we are starting to see some stabilisation in advertising spend. Ad growth is expected to continue accelerating into 2H23e given an increase in advertising activity, and easier comps vs 2H22.

+ Cloud showing healthy growth in the face of moderating consumption. Google Cloud showed resilient growth in the face of slowing cloud consumption trends. Cloud revenue increased 28% YoY to US$8bn with growth in both seats and average revenue per seat. Additionally, Cloud saw extensive customer interest in its AI-related products like Bard and Duet AI. Operating income for the segment was US$395mn (5% operating margin), its 2^nd consecutive quarter of profitability.

+ Earnings grew for the first time in 5 quarters. With re-accelerating topline growth, a sharp reduction in total expenses, and restructuring charges behind them, GOOGL finally posted earnings growth after 5 consecutive quarters of declines. PATMI of US$18.4bn grew 15% YoY, with net margin of 24.6% expanding by 2%/3% YoY/QoQ as a result. As AI drives improvements in efficiency and productivity, we continue to expect margins to improve moving forward – FY23e PATMI is increased by 4%, with net margin of 24.4% (1H23: 23.1%).

The Negative

- Nil.

• 1Q23 results were within expectations. 1Q23 revenue/PATMI were at 23%/21% of our FY23e forecasts. Adj. PATMI (excl. one-off restructuring charges) was at 24%. Earnings were hurt by a one-off US$2.6bn restructuring charge.
• Revenue growth of 3% was led by travel and retail advertising. Cloud turned the corner on profitability, even amidst slowing topline growth. Cautious outlook for the remainder of FY23e given the uncertain macroeconomic backdrop.
• We maintain BUY with an unchanged DCF target price of US$131.00, with a WACC of 7.3% and terminal growth of 3.5%.

The Positives

+ Revenue growth re-accelerated slightly due to advertising revenue. GOOGL saw a re-acceleration in revenue growth, posting total revenue of US$69.8bn, 3% YoY (4Q22: 1%). Growth was driven by a 2% YoY increase in advertising revenue from Search (4Q22: -2% YoY) as spending from its travel and retail verticals improved. Additionally, ad revenue from YouTube showed some signs of stabilisation, declining only 3% YoY (4Q22: -8% YoY) as YouTube Shorts monetization increased, offset by some incremental pullback in advertiser spend.

+ Google Cloud momentum slowing, but turned the corner on profitability. Cloud saw some slowdown in its growth momentum, with revenues up 28% YoY (4Q22: 32% YoY). This was led by a continued weaker macro environment, with customers choosing to optimise their current Cloud consumption instead of expanding. Even with topline growth slowing, Cloud posted its first profitable segment, with operating income of US$191mn (1Q22: US$706mn) – operating margin of 2.6%, as management remained focused on driving longer-term profitability in this segment.

+ Earnings in-line with our forecasts. GOOGL announced 1Q23 PATMI of US$15.1bn, in line with our expectations as the company continued to be more prudent with expenses. Earnings were hurt by a US$2.6bn one-off restructuring related charge, offset positively by a US$1bn reduction in depreciation expenses due to an increase in estimated useful life of servers and other equipment, and a delay in timing of its stock-based compensation. 1Q23 PATMI was at 21% of our FY23e forecasts, with Adj. PATMI (excl. restructuring charges) at 24% of our forecasts.

The Negative

- Cautious FY23e outlook. Given the ongoing uncertainty in the macro environment, management remained cautious for the remainder of FY23e, expecting advertising revenue growth to remain muted, with continued decline in Cloud momentum.

• 4Q22 results was within expectations on both revenue and earnings. FY22 revenue/PATMI is at 99%/95% of our FY22e forecasts. Adj. PATMI (excl. unrealised losses) is at 100% of our forecasts. Revenue was dragged by 2% YoY decline in ad revenue, and 6% FX headwinds.
• Cloud momentum is still strong with 32% YoY growth for 4Q22. But there was a -US$480mn operating loss. Cloud accounts for only 10% of total revenue.
• Slowing FY23e expenses growth with 12,000 job cuts in 1Q23e, reducing office facilities, and more prudent investments. Guidance for FY23e CAPEX is roughly in line with FY22
• We cut our FY23e revenue forecast by 9% to account for continued weakness in digital advertising demand, while reducing CAPEX spend by 20% to reflect a general slowdown in expenses. Our FY23e EBITDA forecasts are also cut by 17% to reflect slower-than- anticipated margin expansion due to expected US$2.3bn severance-related charges. We maintain BUY with a raised DCF target price of US$131.00 (prev. US$124.00) due to potential upside from increasing YouTube Shorts monetisation, continued strength in Cloud, and margin expansion in FY24e from the slowing pace of expense growth as a % of revenue, with a WACC of 7.3% and terminal growth of 3.5%.

The Positives

+ Google Cloud momentum still strong, with profitability in focus. Cloud remained GOOGL’s fastest growing segment, increasing 32% YoY to US$7.3bn as customers continue to leverage on Cloud’s AI/Infrastructure/Cybersecurity offerings. Cloud continues to operate in the red, with a 4Q22 operating loss at -US$480mn, although management spoke about its focus on making Cloud profitable sooner rather than later.

+ Slowing expense growth guided moving forward; FY23e CAPEX in line with FY22. Management remains committed to slowing expense growth moving forward; guiding FY23e CAPEX to be at similar levels with FY22 as it consolidates office facilities, offset by continued investments in tech infrastructure. GOOGL also announced the reduction of around 12,000 jobs (~6% of workforce) in 1Q23e as it looks to reduce some of its fixed costs, and will remain prudent and more selective when making investment decisions. FY23e operating margins are still expected to remain relatively similar compared with FY22 at around 27% due to consolidation and severance-related charges, but to expand more meaningfully in FY24e.

The Negative

- Headline earnings missed on weakness in advertising demand, inventory charges, and FX drag. 4Q22 revenue of US$76bn missed estimates marginally by US$440mn, dragged down by a 2% YoY decline in services (advertising) revenue; and a 6% FX headwind. Headline earnings also missed due to higher-than-expected inventory charges of US$1.2bn; and a US$1.5bn unrealised loss on debt/equity investments.