No. of Recommendations: 43
Google Cloud is really now staring to become a big part of Google's business, with the potential to become its largest growth driver and profit contributor.
What many don't realize is that most of the growth (32% year on year) from the cloud component of Google comes from the AI services, so this 32% underestimates what might be seen going forward as the AI services become a higher proportion of the total cloud revenue.
The cloud operating income increased by 141% year-over-year owing to the operating margin rising from 11% to 20.7%. This leads the profit to be around 10% of Google's total profit.
I predict that the operating margin will fall within the 30% to 40% range in a few years, similar to Amazon's cloud services (AWS). That would put the profit from cloud at around 20%, from the operating margin alone, however the services will grow faster than advertising, so they can conceivably asymptote towards 30% or so of Google's total profit over several few years.
Google Cloud's competitive advantage lies in its "full-stack AI approach," which covers all layers of the AI ecosystem, from research and infrastructure to models, tooling, and applications. This is more competitive than what AWS (Amazon) and Azure (Microsoft) are offering.
Google trains its Frontier AI models, like Streamline Pro, on its proprietary ASIC Tensor Processing Units (TPUs), which offer a cost advantage for certain AI workloads, especially AI inferencing.
Nvidia is being given a large premium for providing such hardware because of the expected growth, but Google's hardware and service supplies are likely going to see a similar growth.
OpenAI, a major competitor, has even begun using Google Cloud's AI infrastructure, indicating Google's strong position in the industry.
There was no sign of Google's revenue growth falling from advertising (other than the third party website ads which they are no longer pushing).
The narrative is still negative for Google but I expect the narrative to start changing over the next year, and Google's 20x earnings multiple is likely to merge closer towards its competitors (Meta at 27x, Amazon at 37x) and back to its own average trading level of around 26x. That would raise the quote by 30%, plus the operating income gains.
I have been predicting for a couple of years, in diametric opposition to the Wall Street consensus, that Google's adverting business as a whole will have a net benefit from the AI advances with LLM because it will allow Google to target much better, so the auction rate will rise. I'm amazed that something as obvious as this is not being discussed by any analyst that I have yet observe.
A lot of Google searches don't relate to produce/services and just return website with info - those searches will of course be replaced by AI responses without ads, but they didn't have ad links before also so nothing new there. I'm not sure why Wall Street is panicking about those searches. Where ads are helpful to the query, Google will include them, and the targeting will be better, and auction rates higher.
Looking good at $192 per share.
Applying the Manlobbi Method to calculate the IV10/price ratio (intrinsic value in 10 years assuming dividends reinvested, divided by quotation today).
Step 1: Is Google 'Steadfast'?
- Test 1: Will earnings by extremely likely above some minimum baseline in 10 years? Yes. Advertising market share may decline but people will be performing much more product/service searches in 10 years so the total pie will be substantially larger than today.
- Test 2: Extremely long-term test - is there any chance of catastrophic earnings loss after 20 years? No. If broken up (unlikely substantially) constituent parts will continue to operate well.
Step 2: Calculate IV10/price
Operating income gains over 10 years: 14% per year, with cloud services comprising 20%+ of earnings.
Normalized multiple, 26/21: 24%
Dividend: 8% additional gain over 10 years assuming reinvestment (it would be 5% without reinvestment)
IV10/price = 1.14^10 * 26/21 * 1.08 = 5.0
That's a really high IV10/price ratio.
- Manlobbi
No. of Recommendations: 1
Nice post, thanks!
I have this theory or at least suspicion, that it is going to be really hard to NOT make money in AI. My theory is that the demand for AI is so high and is growing so fast, that very plausibly the top 5 performers in this area will ALL make money.
So then the biggest risk is NOT being invested in AI.
Or am I just drinking more than my share of Kool-Aid?
R:/
No. of Recommendations: 6
well argued bear case:
google is becoming capital heavy w/cloud+AI buildout.
quality of earnings unambiguous worse than decade ago..
"...today. Google made net income of roughly $100b in 2024. FCF was ~$73b. When you remove stock-based compensation of $23b, the economic profits of the business were $50b.
This is half of what they are showing in accounting profits. In other words, this makes the business look much cheaper than it really is.
Again, this is the difference between depreciation charges tied to their capital investment, primarily in AI, versus the actual cash costs of capex in 2024. Why do we think it is so dangerous? It’s the same thing the oil companies did during the 2010s..."
smead, jul 2025
No. of Recommendations: 8
I'm often too short sighted with my investments. Trading in and out of Berkshire on variations of P/B for example. When I look at my non-Berkshire trading activity over the past year a certain sense of guilt takes over (what happened to "buy and hold"?). Was the trading all worth it? In the long run, probably not given the amount of time spent obsessing over current price.
Recall that on 7/28/2025 our esteemed moderator and polymath, Manlobbi, estimated a potential 5X move in the stock price over the next ten years (my interpretation of his IV/10/price method outlined in his book). On that day GOOGL closed at $193/share. A 10x on that price would mean almost $2,000/share in ten years. I may trim some of my GOOGL portion to raise cash in the coming days but I will certainly keep a significant portion of my net worth in this company. As Manlobbi has outlined, the growth future prospects (for advertising, cloud, You Tube,etc) seem overwhelmingly bright.
Perhaps Manlobbi can chime in. Go back and read some of his earliest posts on this board - amazingly prescient.
No. of Recommendations: 2
Whoops...
Correction: On that day GOOGL closed at $193/share. A 5x on that price would mean almost $1,000/share in ten years.
