Google – AI Bubble?
Share price
Google share price has been on a tear since its last earnings, with its share price now up 65% since the company announced earnings for Q2. It has now surpassed the market cap of Microsoft and its share price has doubled during the year. Fears of ChatGPT and other AI taking market share from its search (which accounts for 55% of its Q3 revenue) has been alleviated by rapid takeup of Gemini and that it seemingly integrates well into the Google search package.
Growth
The rate of sales growth is still impressive with QoQ revenue growth of 6-7% in each of the last two quarters, driven by high growth rates in both its Subscriptions, Platforms and Devices segment as well as the Cloud segment. Also showing solid growth is its Search segment, which we expect to have grown by 11% YoY - robust considering the concerns over the impact of AI.
Q3 Earnings
PP&E (including AI chips) has increased by $54bn since the end of 2024. Like all big tech, Google pays a fortune for Nvidia's chips to keep at the cutting edge of AI. This is equivalent to about 23% of the total costs of the company. As it is capital spending and the chips should perform over a number of years, the cost of these are capitalized and will only show up in earnings after a delay. Also, going forward, will be the energy cost required to power and cool them. In Q3, GOOG accrued an additional $3.5bn in European Commission antitrust fines, included in 'General and Admin' expenses taking the provision on its balance sheet to £10.6bn. Given the ongoing and increasing regulatory scrutiny in both the US and Europe, it is highly likely that Google will face future fine-related costs. The EU, for example, can fine companies up to 10% of their global turnover for breaching the Digital Markets Act, which could result in fines of tens of billions of dollars. In the US, a federal judge has already ruled that Google has an illegal monopoly in online search and text advertising, with penalties still to be determined.
Critical Factors
Google's AI-driven search features face intense competition from rivals like ChatGPT and Bing's Generative Search but it is in a good position to be one of the top beneficiaries of the AI revolution. However, the execution risk is massive, given the cost of AI infrastructure and the uncertainty over how people will use AI in the meduim term. For the Cloud segment, Google is playing catch-up to more established rivals like Amazon Web Services (AWS) and Microsoft Azure, which have stronger enterprise adoption.
Bonus – Financial Modelling Tip of the Day
When analysing revenue drivers, always separate the impact of pricing from volume. A price increase typically carries no incremental cost, meaning the uplift flows almost entirely to the bottom line, making pricing one of the most powerful levers in any model. In contrast, volume growth often comes with variable costs—production, delivery, or sales expenses—that dilute its profitability impact. Build your model to isolate these effects so you can clearly see which levers truly drive earnings.
The associated GOOG financial model for Q3 2025 is now available – download the model and make informed, confident decisions.