Google’s Rough 2025 Could Be Setting the Stage for a Comeback
2025 has been a challenging year so far for Alphabet (GOOG, GOOGL), with the stock down about 9% year-to-date. The company has significantly underperformed compared to the Nasdaq and the tech giants leading the market rally, such as competitors like Nvidia (NVDA) and Microsoft (MSFT).
Alphabet’s struggles have come during rising concerns that the company might be losing its edge in the face of growing competition in the artificial intelligence (AI) space, most notably from OpenAI's ChatGPT. Despite these challenges, there are reasons to believe that Alphabet's recent stock performance may be overblown and that its valuation is ripe for a rebound.
Key Factors for Future Growth
Alphabet has been investing heavily in AI, which has helped the company improve its operating margins. In Q1 2025, Alphabet reported an operating margin of 40%, a new record for the company. Analysts expect this margin to continue its upward trend, helped by cost-cutting efforts like layoffs and buyouts, and the efficiencies brought by AI technologies. These efforts have helped Alphabet recover its profitability, despite a tougher market environment. Furthermore, Alphabet's strong balance sheet, with $84 billion in net cash, gives it plenty of room to continue investing in its growth, including share buybacks and moonshot projects like Waymo.
Valuation: An Attractive Entry Point for Long-Term Investors
One of the most compelling arguments for a potential Alphabet comeback is its stock valuation. Alphabet currently trades at just 11 times forward EV/EBITDA, significantly lower than its 10-year average of 12.4x and far from its peak of around 15x. This drop in valuation, despite improving margins, strong cash flow, and vast growth opportunities in AI, cloud, and video, suggests that the stock could be undervalued, offering an attractive entry point for long-term investors. Jefferies analysts maintain their "Buy" rating for Alphabet, setting a price target of $210, which represents more than 20% upside potential.
Looking Ahead: Navigating AI, Cloud, and the Earnings Report
As Alphabet continues to strengthen its position in AI, cloud, and video, its underperformance in 2025 may reflect more of a market rotation and the waning excitement around AI hype, rather than any significant fundamental weaknesses. The upcoming earnings report, expected in late July, is a key moment for the company. This is an important opportunity for Alphabet to reset the narrative and remind investors of its long-term growth potential.
If the company can demonstrate continued strength in its core areas and manage the AI hype cycle effectively, Alphabet could be poised for a comeback in the second half of 2025. Investors will be closely watching for signs of sustained growth in its AI initiatives, cloud expansion, and margin recovery. If Alphabet delivers on these fronts, its stock could easily see a rebound, especially as the company’s valuation presents a compelling risk/reward scenario for long-term investors.
