Episode 71 | Google’s Resilience in the AI Era

In Episode 71 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, reevaluates Alphabet (Google) through the BMPB framework, highlighting the company’s dominance in search, advertising, and cloud services and Gemini’s competitive AI position. He reviews Google’s consistent revenue growth, exceptional margins, and robust free cash flow of $73 billion. Leadership under Sundar Pichai has driven bold innovation efforts, such as Project Sun Catcher and TPU chips, and has emphasized the company’s efforts to strengthen regulatory clarity and competitive positioning. With a reasonable 26x forward PE and an exceptional balance sheet, Professor Lake reflects that Alphabet remains well-positioned for long-term investment success in the AI era.

Chapters

• 0:00 Introduction
• 1:43 Business
• 12:04 Management
• 15:28 Price/Valuation
• 17:44 Balance Sheet
• 19:52 Conclusion

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started.
Welcome back to Market News at Rodney Lake. I'm your host, Rodney Lake. On today's episode, we're going to go over a company that we've gone over before. It's in the portfolio, but it's in the news. So we're going to go over it again. We're going to use the framework: business, management, price valuation, and balance sheet. That company is Google.
Parent company name is Alphabet. We all know it is Google. But technically, the overall name is alphabet. So this is a GW Investment Institute podcast. Welcome to anyone that's new to the show. And welcome back to the people that are listening on Apple, Spotify, Amazon. Thank you. And if you're watching on YouTube, thank you very much and thanks for tuning in again.
If you're coming back, much appreciate it. All right. So this is entertainment and educational purposes only. And we're going to talk about the company Google. Again, the parent company Alphabet. But I'm going to say Google for most of the show. And I think you know what I mean. All right. Everybody knows this company maybe uses this company every single day, for search or for your Gmail or whatever you happen to use.
But there's a lot of touch points with this company. And, and if you happen to be watching us on YouTube, for example, obviously that is one of the major properties for Google now, this is a holding. It's been a holding in the Investment Institute, one of several of our portfolios for years. Great job by our students for finding this.
And again, this is a GW Investment Institute podcast coming to you from the George Washington University School of Business right here in the heart of Foggy Bottom, Duques Hall, Duques studio. All right, so let's kick it off. What's the business of Google? So, let's get some metrics here. To start with. I think, again, I think you all know this company.
But let's let's put some parameters on when we go on the business side here. So how large is this company to start with? Well, this is one of the mega mega cap companies. Uber mega, however, you want to say it right now, this is mid-November. You're talking $3.4 trillion market cap. So that's a massive company, one of the largest companies in the world.
You know, Nvidia is a little bit bigger, as an example. But one of the largest market cap companies in the world. So let's, let's dive into the business, obviously, I think you know, what they do. Search is a huge part of their business. The cloud is a huge part of their business. YouTube is a huge part of their business.
And so how do they make money advertising still primary driver. They still dominate search 89%. I think lots of people were concerned, especially when you have this legal overhang. And once they got out of that in this payment from Apple, once that kind of cleared up and the judge ruling was probably a little bit more favorable.
Now we're going back several months here than what people expected. I think that's lifted the clouds on this, on this set up. And the performance has been quite good since then. And so but let's talk about the overall business. And so but when we talk about the business, we you know, let's dive in what we do to the revenue and where are the margins.
And this is, you know, what's the network effect in this business. It's still quite high. And people were concerned about, you know, their dominance from the regulatory angle. Plus, you know, are they losing, you know, search to OpenAI, for example, and people typing in their queries to ChatGPT. But that doesn't seem to have gone quite as fast as people expected.
And of course, they have their own model called Gemini. That has made a lot of progress. It was first called Bard. You know, part of DeepMind, let's say, and then Bard and now this is, Gemini is the front facing, 2.5 right now. And it's gotten better, depending on how you rank it and the way I rank the models at the moment, I would I would put number one is Grok and Grok 4.1 is out and I still have them at first.
And again, this is my view of these large language models. So this is the Rodney Lake ranking coming from the Market News with Rodney Lake podcast ranking. So these are not deep researched, benchmarked and all this other stuff. This is my hot take on where I think these models are in relation to the things that I use, which is principally for investment research.
Number one is Grok. Number two, I'd put ChatGPT, number three, I'd put Anthropic. And I would say that they're close right now. And then I would say number four is Gemini. But I think Gemini is getting better overall, but not with respect to investment research. A lot of times it won't run the models that I give it.
And so, still working on that, I don't know. But for lots of other things, coding, I actually think it's quite good. And all the models are actually pretty good on coding, at the moment. And so, tip of the cap to all of my on that. And so tough news for anybody that's a junior programmer, probably.
But maybe it accelerates you, it makes you better. So you should learn how to use all those models, you know, public service announcement a little bit right there. In any case, getting back to the business of Google, let's dive into the numbers. And so the third quarter 9/30. So they have a fiscal year end of 12/31, which is the calendar year end as well.
What is the revenue for Google? So if you go last 12 months through, the last reported quarter, which is September 30, revenue is 385 billion. I'm laughing a little because these numbers are crazy, right? Really big numbers. What's the gross profit here? 228. And what's that margin? That margin, oh, by the way, back to the revenue for one second that grew 13%.
So people concerned, okay, what's going to happen to the business doesn't seem to be that much of a concern. But the full year number is projected at 340. So it's a little bit of a dip. It's a projected through 12/31 is the current consensus. We'll have to see how that turns out. Again, we're approximately in November here, a little bit deeper.
So we'll see. And then if you look at the 2026 number for on the revenue 388, again that's the consensus number. And that would be 14% year over year growth. So back to the single year here or the last 12 months, 9/30/2025. Gross profit, 228 billion, 59% gross margins. So this puts Google Alphabet in the exceptional territory.
When you talk about gross profits. Let's get down to the to the net margins here. Net margins of 27%. Very good. $100 billion. In the trailing 12 months, that's up 27% on that, on that, number 106 billion. That's an exceptionally great number and exceptionally great growth. And these things have been consistently, sorry, didn't grow 27%.
That's a 27% margin. Excuse me. So the net income 106, a 27% margin on that. That is fantastic. And so, you know, things have gone are going very well, in this situation for, Google. And so these are exceptional numbers. When you talk about a gross margin of nearly 60%, and approaching 30% for the net margins.
Excellent. And so let's go to what's the full year number look like? The full year number for 12/31 2025 on the gross margin side 229. Just a slight tick up there, but on the gross margin side, 67% again, put even higher, than the trailing 12 months. And then if you look at the net income, you also better 132 and 39% margins.
And so when we talk about this, all right, before we give it a score for the business, management, price valuation, balance sheet, business category, let's go through where it's been. So on the revenue side, when you talk about 2021 257, then it goes to 282 in 22, 307 in 23, 350 in 24, and 385. And so that's 41% growth, 9.8% growth, 8.7 and 14, respectively.
So these are not fantastic growth numbers. Obviously, the first one there is but you know, these are good growth numbers but not terrific. But when you talk about then the gross margins. And let's look at the gross margins across these periods, 56% in 21, 55% in 22, 56% at 23, 58 in 24, 59 so far through 25 trailing 12 months through 9/30 and then projected 67 even higher, going higher.
Right. So on the business side, I mean, what should you give a business that has these net and gross margins? And before we give it a score, let's just dip down, to the free cash flow. And so they're investing quite a lot of money. So they're going to cash from operations through the September 30. Trailing 12 months is going to be 151 billion or is 151 billion.
Was 77 billion in CapEx. So you heard about these gigantic CapEx numbers because of AI, right? They're deploying lots of capital, and we're going to go over that here in a second. But free cash flow, $73 billion, even after plowing a ton of money into CapEx, they're still generating $73 billion in free cash flow. The projected here is that they're going to spend 91 billion for the full year 2025 and free cash flow of 62 billion.
Obviously, deploying a lot of capital, but 62 billion of free cash flow projected for 2025 monster, monster year. And that's after CapEx being $91 billion. Now, if you look at CapEx back in 2021, CapEx was $24 billion. The highest it hit was, you know, 52 in 2024. So it accelerated, more than doubled from 21 to 24.
And now is approaching again, a 4x in 21. And this is the these are huge numbers, over a short time period. And it's a double since really 20, 24, almost 52, 91. Obviously not a full double there. But very much approaching, a doubling in CapEx just from one year to the next. That is the AI spend. Nobody wants to lose this race.
So even with all that, even with these massive CapEx budgets, what do we give Google on the business? Well, I think after seeing what's happening on the legal side, and if you look at the long term, this vertical integration, we didn't even talk about the TPUs next, or yet, but worth mentioning. They have their own TPUs.
So that's tensor processing units and that's their own chips that compete, for workloads not directly with Blackwells. These are more specific for AI and machine learning workloads, but they're they're they're own designed chips, and they have been getting better and better, as they've iterated these chips, but they design these and they're working well, they're putting them into those data centers.
So I think that gives them a bump there, too. And something fun. They have this project Sun Catcher. Where they're going to put data centers in space. So that's will be pretty interesting. We talked about that a few episodes ago. And I think people thought possibly I was crazy, at least for different reasons, but including this one too.
However, now you've seen, Google talking about this, you've seen SpaceX and Tesla talking about this, and, and you've seen Amazon talking about this. And so more people are thinking about how do we get more compute, AI compute, especially in space. Their project is Project Sun Catcher. You can Google it and see their white papers, and research on this.
I do think it's interesting. I think it's worth paying attention to. And I do think that is going to be an area of growth back to I mentioned before, but data centers in space, I think it's going to come faster than people expect. And it's going to it's going to mean a lot more, to the actual compute workload than people think.
Obviously, you can get lots of sun up there. Managing, by the way, the heat, I know it's different in a vacuum for any of our engineers watching. And last time I sort of made some flippant comments about how it's very cold in space, but obviously you have to manage it differently in a vacuum. Just to clarify that, for any of those people that were watching that.
But I think that's going to grow. So I think that's worth watching. So what would you give this business? So the 8.5 is what I would give it. And so let's move on to some of the other components. And we'll probably come back to mention a few things on the business, as we wrap up. So now let's move on to management.
So who manages? Sundar Pichai is the CEO of Alphabet. I think he's been doing an excellent job. Obviously take over from Larry Page here, who's one of the co-founders, along with Sergey Brin. Tough job. Big shoes to fill. But he's been doing an excellent job really growing, here on the data center side, really growing, you know, hats off.
Tip of the cap on the TPUs and making sure that that's super important. And overall running the business very efficiently. And I would also give a tip of the cap here on spending the money, really going after it on the AI trade. I do think that there can be some overcapacity. And Sundar Pichai just mentioned this recently in the news that there could be, you know, a bubble in the AI race, but nobody wants to lose it, including Google Alphabet.
They do not want to lose this race. And they are putting money to work to to win the race. And I think that is justified because I don't know if it's going to be a winner take all. But I think there are going to be winners and losers in this race, just like in other races. When you talk about transformative technologies like the internet, as an example, like rail, as an example, going back, you know, way back, these transformative technologies come with some overbuild, but there will be winners and losers.
Out of the internet bubble came great companies like Amazon, right? When people said, well, you have to sell a gazillion books, but they ended up doing a lot of other things, right, with the platform that they had built. So I think Sundar Pichai and company get a tip of the cap, investing the money, keeping the business profitable, really continue to dominate search.
Probably the only, maybe not the only, but one of the few really vertically integrated companies, with respect to having its own LLM, having its own chips on the TPU side for the workloads and having their own data centers. And certainly having that customer interface. And so, they don't have as many enterprise clients, let's say, or not, maybe as well known on the enterprise side as Google, but they still have enterprise clients for sure.
And when you talk about when you're integrating these models and you're integrating Gemini into the workflow, with Google Docs and Google Sheets and all the things that they have in their office products, I think that positions them very well. And then you look at the vertical integration, where they have their own large language model. So Gemini is embedded, into search, embedded into Gmail, embedded into Sheets.
That is a formidable position for Google. Now there's other, do other people have advantages? Clearly they do. But I think this vertical integration comes with a particular advantage that is specific, at least right now to Google. And then you include the TPUs. Amazon, for example, has its own Trainium chips, as well, but does not have that same enterprise connection, offering this, you know, Gmail and Office products that Google has and certainly doesn't have the search that Google has already.
And and the YouTube, which is another huge component of the YouTube, of the Google Enterprise is that and we're not even talking about Waymo. And that, you know, that's an obviously, AI application upside that they have to, you know, again, tip of the cap, to the management here. So what would we give, management on the score?
I think it's a solid eight. So Sundar Pichai and company get an eight here. So an 8.5 on the business and 8 on management. Now let's go to the price versus valuation. So where do they sit on price versus valuation. Obviously this big company it's profitable. We can just use the earnings per share. Really the PE ratio here for what we're going to do.
So what's the PE ratio. Remember we're thinking about today and the future. So if you're buying shares today, not investment advice we own these. We own Google. But if you own it today you got to think about where is it today and where is it going to go in the future. And so we're looking at the forward PE, not the trailing.
The forward PE is 26 times. This is not a super expensive company. Certainly not versus historically where they've been so 26 times is, you know, slightly above, you know, above a market multiple. So not too worried about, you know, where it is right now. And, and I would say, you know, not super concerned about this valuation.
You would even say possibly this is an attractive valuation. And that's after the year to date run right now is plus 50% outpacing the S&P for sure considerably. And the Nasdaq. But even after this run and again there's probably some legal overhang. Along with that number plus 50%. You're now trading at 26 times. So this is decent.
This is not a crazy number. And worth noting, by the way, that, you know, recently, announced that Berkshire Hathaway, had a, you know, a purchase of Google, in there and not a huge position for them. But I think just up, you know, under $5 billion, as part of their portfolio, but obviously a significant position, and notable, the first time that certainly they've reported buying shares of Google.
That's probably Ted or Todd. Possibly, born Warren is on his way out to sort of this Thanksgiving letter. He's going to be a little bit quieter than normal. It's a little bit of a sidetrack there, but they bought shares of Google and obviously notable and, you know, some of the, the shares popped on the news, of Berkshire Hathaway being a buyer of Google shares, for their equity portfolios.
All right. So the valuation again 26 times is pretty straightforward here. This is a great company. Great business. Great management team. Price versus valuation out at 26 times forward for this great business I'm also going to give that an 8. All right. So now let's move on to the balance sheet. And we'll pull everything together at the end of the episode here.
So let's move on to the balance sheet. All right. Where is Google with the balance sheet. Well you're not going to be surprised. Possibly if you follow Google, but their balance sheet is going to help you sleep like a baby at night. They have 98 billion. This is, 9/30/2025, through the third quarter.
And, total total assets, total cash and cash flow. It's 98 billion and 37 billion of debt. So huge net cash position, right? Not again. We're sleeping like babies at night. Nobody's worried about the balance sheet. Now. Let's look at it over time. They had more cash on the balance sheet. Over the years. It's bumped up slightly since the end of last year.
But in 2021, almost 140 and 28 billion in debt, 113 in 22 and 29 in debt, 110 in 23 and 28, and 95 and 25 in 24 and now, through again, the trailing 12 months not ending on 9/30. And the debt here, 98 in cash and cash equivalents at 37 again with a huge net cash position.
We're all sleeping like babies at night. Not worried about what's happening on the balance sheet. And I would even say that this balance sheet, plus, as we talked about, we're going to generate after spending at Google Royal, we were shareholders, 77 billion in CapEx through this period. And we're going to generate 73 billion or generate 73 billion again through the full year, going to spend 91 billion and going to generate 62 billion in net and free cash flow.
Remember debt right now, 37 billion. So free cash flow will cover this. And so when you talk about the interest coverage ratio because they do have that, we can calculate this. What is the Ebit, which is the interest coverage ratio over total interest expense earnings before interest and tax over the total interest expense. 420 is the number. So that is a wild number.
So again sleeping like babies, balance sheet gets a 10. So let's pull it all back together here. To round out the episode we are talking about Google parent company is Alphabet, ticker GOOGL. As the class of shares that we own, the business is a fantastic business. They still dominate in search. They're still very dominant in YouTube.
And we didn't talk a lot about YouTube, but I think we probably deserve a whole separate episode on YouTube and YouTube TV and the subscriptions that they have rolling there. That is a growing business. And they they're still very dominant there in search. And obviously that money then comes from advertising. And so they're very dominant number one, in that category now 8.5 for that business again, really high gross.
And that margins that have been consistent. And they are investing heavily to win this AI race. And they have again this vertical integration that few of the companies can replicate, at least right now with their own TPU chips, with their own data centers, with their own large language models, large language model, Gemini, their own office products, and also individual products.
And so I think that's a formidable, vertical integration that they have going business gets an 8.5. Management, Sundar Pichai has been doing a great job since taking over from Larry Page, one of the co-founders, gets an 8 doing a great job investing heavily. Spending almost 100 billion, in the CapEx world. This year. And even after that, again, that'll be for the full year, 91 billion really doubling, almost doubling since 2024.
So very aggressive. Still going to produce 62 billion projected, for the year end and free cash flow. It's managing the business well playing to win, which we like. We do think you got to play to win in this game. There's going to be overcapacity. They mentioned this Sundar Pichai himself in the news recently talking about, you know, this is going to be a challenge that there could be overvaluation in this market.
But they have the moonshots like, Waymo, the full Self-Driving plus, the program for data centers in space. Again, that's their project some catcher. I encourage you to check that out. We mentioned that a few episodes ago. Data centers in space. Google's going to be part of that. It's going to come quicker than I think people think.
All right. So an 8 for a management price valuation 26 times on the forward. Not really worried about that. So very good there. And on the balance sheet sleeping like babies. Huge net cash position generating a ton of free cash flow. Not worried at all. Interest coverage ratio 420. Again, we're all sleeping like babies with this balance sheet.
So 8.5, 8, 8, 10 business, management, price valuation, and balance sheet respectively. That gets us a score of 8.625. That's an excellent score. Again not investment advice, but I do think Google is well positioned. They are playing to win the AI game. We say good luck to them. Good luck to the management team. Good luck to our portfolio. We hope you tune in to the next episode for Market News with Rodney Lake.
That's it for today. Thank you.