1 Red Flag and 1 Green Flag for Alphabet in 2025

Understanding why an investment may fail is as important as knowing the reasons for its potential success. This is especially true when considering an investment in a company like Alphabet (GOOG) (GOOGL), which is currently showing two very different signals to its investors.

On one side, Alphabet's advertising business remains stable, while its cloud computing and artificial intelligence (AI) segments are experiencing significant growth. Furthermore, the stock is currently valued reasonably low. However, there's also a major concern: the U.S. Department of Justice (DOJ) is pushing to break up Alphabet, citing illegal monopoly practices surrounding its Google Chrome browser. Thus, which of these factors should investors focus on more?

Red flag: DOJ Investigation Looms Over Alphabet

For quite some time, the Department of Justice has been scrutinizing Alphabet, and now, the situation has escalated. A recent ruling determined that Google, a subsidiary of Alphabet, has been operating under an illegal monopoly, prompting the DOJ to recommend the forced sale of Google Chrome. While the judge has yet to reach a final decision, the litigation process could extend over several years.

Alphabet has the option to appeal to the Supreme Court, which itself can prolong the proceedings. This uncertainty creates a burden that Alphabet will likely need to manage. It's possible that the company is already preparing strategies for the potential loss of Google Chrome.

A cautionary example can be found in the antitrust case against Microsoft in the early 2000s. Initially ruled against in April 2000, the appellate process stretched until June 2004 before a remedy was finalized. Given this prolonged timeline, Alphabet may still face several years before resolving their legal troubles, so investors shouldn't rush to abandon their stocks at this moment.

As such, this red flag may serve more as a distraction than a significant concern for the year 2025.

Green flag: Strong Growth in Google Cloud and AI

If one were to examine the financial performance of Alphabet, they might wonder why the stock isn't performing better. In the third quarter, revenue grew by 15% year-over-year, and earnings per share jumped from $1.55 to $2.12, representing a substantial 37% increase. These gains largely stem from the flourishing Google Cloud division.

With a rich suite of AI tools at its disposal, Google Cloud has become a favored choice for businesses. A key reason for this popularity is the access it provides to advanced Graphics Processing Units (GPUs) and proprietary Tensor Processing Units (TPUs). The TPUs often outshine GPUs in specific workloads, leading to notable reductions in both AI training costs and time. For numerous companies, leveraging Google Cloud is a more cost-effective way to develop AI models, contributing to its rapid growth.

During Q3, Google Cloud's revenue surged by 35% compared to the previous year, accelerating from the 29% and 28% growth rates observed in the earlier quarters of the year. As this sector expands and becomes more operationally efficient, it stands to enhance Alphabet's overall financial outlook significantly, making it an essential part of the company’s portfolio.

Moreover, the ongoing DOJ investigation allows investors to acquire Alphabet shares at a relatively attractive price. Currently trading at approximately 24 times forward earnings, Alphabet is significantly cheaper than many other major technology stocks.

To put this in context, a glance at some of the peers known as the "Magnificent Seven" illustrates Alphabet's positioning:

Company	Forward P/E
Alphabet	24
Apple	34
Nvidia	47
Microsoft	34
Amazon	45
Meta Platforms	28
Tesla	168

Based on this information, Alphabet stands out as the most affordable choice among these tech giants, while simultaneously exhibiting solid financial performance comparable to its peers.

Considering these factors, the advantages of investing in Alphabet seem to outweigh the risks. The company is well-positioned for a successful 2025, particularly due to the strength of its AI business, even with the ongoing DOJ investigation hovering overhead.

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