GOOGL Q3 Deep Dive: AI Adoption Drives Revenue, Margin Pressures Loom

Online advertising giant Alphabet (NASDAQ:GOOGL) announced better-than-expected revenue in Q3 CY2025, with sales up 15.9% year on year to $102.3 billion. Its GAAP profit of $2.87 per share was 26.9% above analysts’ consensus estimates.

Is now the time to buy GOOGL? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Alphabet’s third quarter was marked by strong revenue growth, with management attributing the momentum to increased adoption of artificial intelligence (AI) across Google Search, Cloud, and YouTube. CEO Sundar Pichai highlighted that AI-powered features such as Gemini and AI Mode are driving higher user engagement and accelerating query growth. The company also experienced notable gains in its cloud business, with enterprise customers increasingly adopting Google’s generative AI models. Management pointed to robust growth in paid subscriptions and improved monetization through new ad products as additional contributors to the quarter’s positive performance.

Looking ahead, Alphabet’s outlook is shaped by continued investment in technical infrastructure to support AI-driven growth, alongside efforts to manage expense pressures from higher depreciation and energy costs. CFO Anat Ashkenazi emphasized, “We expect the growth rate in depreciation to accelerate slightly in Q4,” reflecting ongoing capital investment. Management also sees opportunities for further expansion in AI-enabled products and cloud services, but cautioned that capacity constraints and macroeconomic factors could influence performance in the coming quarters.

Key Insights from Management’s Remarks

Management attributed the third quarter’s momentum to rapid AI integration across core products, robust cloud customer demand, and increased engagement from both users and advertisers.

• AI-powered Search expansion: Google’s investments in AI Overviews and AI Mode led to increased search queries, especially among younger users, and enabled more conversational and visual shopping experiences. Management indicated that these features drove both higher engagement and incremental commercial activity.
• Cloud business acceleration: Google Cloud saw stronger deal activity, with a surge in demand for enterprise AI solutions and infrastructure, including its custom Tensor Processing Units (TPUs). Over 70% of existing cloud customers used AI products, and revenue from generative AI models grew significantly.
• YouTube monetization and subscriptions: YouTube delivered robust growth in both advertising and subscription revenues, driven by AI-powered recommendation systems and new ad formats. The platform’s NFL partnership and expansion of premium offerings contributed to elevated viewer engagement and monetization.
• AI monetization tools for advertisers: Products like AI Max in Search enabled advertisers to target a wider range of queries, unlocking new commercial opportunities and improving return on ad spend (ROAS). Management cited early evidence of efficiency gains and higher conversion values for businesses using these tools.
• Cost structure and margin dynamics: Operating expense growth was influenced by a legal charge from a European Commission fine and rising depreciation from infrastructure investments. Management highlighted ongoing initiatives to drive productivity, such as leveraging AI for internal processes and optimizing real estate and technical assets.

Drivers of Future Performance

Alphabet expects ongoing investment in AI infrastructure and cloud capabilities to fuel growth, but rising costs and tight capacity will pressure margins.

• AI adoption drives growth: Management believes that expanding AI features in Search, Cloud, and YouTube will continue to attract users and enterprise customers. Gemini model releases and agentic experiences are positioned as central to Alphabet’s competitive differentiation and revenue expansion.
• Capacity and expense headwinds: The company anticipates higher capital expenditures and depreciation, particularly as technical infrastructure investments accelerate. Management warned that these factors, along with increased energy costs, will weigh on operating margins in upcoming quarters.
• Cloud backlog and deal flow: A growing cloud backlog and larger enterprise deals support management’s expectation of sustained revenue growth. However, leadership acknowledged ongoing supply constraints and the need for disciplined execution to convert backlog into realized revenue.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will focus on (1) the pace of AI product rollout and user adoption across Search, Cloud, and YouTube; (2) Alphabet’s ability to manage infrastructure investments and expense growth while maintaining profitability; and (3) progress in converting a growing cloud backlog into realized revenue. Execution in these areas will be critical to sustaining momentum and navigating margin pressures.

Alphabet currently trades at $294.96, up from $274.98 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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