Alphabet 2Q Preview: Higher D&A To Weigh On Earnings; AI Monetization Slows But Continues

Alphabet (GOOGL) has significantly underperformed the Nasdaq 100 and Meta, trading at the lowest P/E among the Magnificent 7, primarily due to its advertising business showing only single-digit growth and muted AI monetization compared to Meta's robust 20% expansion. While Google Cloud maintains strong 30% YoY growth and improving margins, GOOGL's less aggressive FY2025 AI capital expenditure outlook of $75 billion (19% of revenue) compared to Meta's (expected 36%) is dampening investor enthusiasm. Despite concerns about near-term margin pressure from depreciation, the stock is considered deeply undervalued at a 19x non-GAAP forward P/E, with the potential for re-rating as AI monetization matures.

Analysis

Alphabet's (GOOGL) stock has underperformed the Nasdaq 100 by nearly 9% since early April, largely due to investor concerns over the pace of its AI monetization and a comparatively conservative capital expenditure outlook. The core issue stems from its advertising business, which accounts for 74% of total revenue but has seen growth slow to single digits, failing to demonstrate the AI-driven acceleration seen at peer Meta Platforms (META), which has maintained ~20% YoY growth. While GOOGL's Cloud segment remains a bright spot, posting resilient 30% YoY growth with expanding EBIT margins of 17.8%, this has been overshadowed by its capex guidance. The company's planned FY2025 capex of approximately $75 billion, or 19% of consensus revenue, is perceived as less aggressive than META's, which is projected to be 36% of revenue. This has dampened investor enthusiasm in a market that is rewarding aggressive AI investment. Consequently, GOOGL trades at a significant discount, with a 19x forward P/E, the lowest among the Magnificent 7. This valuation appears to have priced in near-term headwinds, including margin pressure from accelerating depreciation costs flagged for the remainder of FY2025.

Key Decisions for Investors

• Given the stock's 19x forward P/E and significant valuation discount to peers, investors may view the current level as an attractive entry point, as concerns over slower AI monetization appear to be priced in.
• Monitor the upcoming Q2 earnings report for any revision to the $75 billion FY2025 capex guidance, as an increase would signal a more aggressive AI stance and could serve as a major catalyst for a sentiment shift.
• Watch for any signs of an inflection point in advertising revenue, as acceleration in AI-driven ad monetization is the key factor needed to close the valuation gap with competitors like META.
• Be prepared for potential near-term earnings pressure, as management has indicated that accelerating depreciation from prior investments is likely to weigh on margins and could increase the risk of an EPS miss in Q2.