1 red and 1 green flag for Alphabet in 2025

Knowing the reasons why an investment might fail is just as important as knowing why it might succeed. This is crucial when investing in a company like alphabet (GOOG 4.35%) (GOOGL 4.34%)as it signals two opposing signals to investors.

On the one hand, the advertising business is stable, business with cloud computing and artificial intelligence (AI) is booming and the share price is cheap. On the other hand, the Justice Department is trying to break up Alphabet due to an illegal monopoly by forcing the sale of its browser, Google Chrome. So which factors should investors be more concerned about?

Red Flag: Alphabet is in DOJ’s sights

The Department of Justice (DOJ) has been on Alphabet’s trail for a long time, but has finally caught it. After a judge ruled that Google (a subsidiary of Alphabet) exercised an illegal monopoly, the DOJ is urging the judge to force the sale of Google Chrome. The judge hasn’t decided what to do yet, but regardless, it could take years for that decision to take effect.

Alphabet can still appeal to the Supreme Court, but that could take a while. As a result, this dark cloud will hang over Alphabet’s head for a while, but it’s probably already developing workarounds in case it loses access to Google Chrome.

MicrosoftThe antitrust case in the early 2000s is the best example of how long this could take. A judge first ruled in April 2000 that Microsoft was exercising an illegal monopoly and ordered it broken up in June 2000. However, an appeals court ruled against this decision in June 2001, and an appeal against the settlement was not approved until June 2004.

Given this timeline, Alphabet still has a long way to go before the final outcome of this lawsuit is known. Investors should therefore not make hasty decisions and exit the stock now.

Therefore, I think this “red flag” is more of a distraction than a signal for 2025.

Green flag: Google Cloud and AI are booming

Just looking at Alphabet’s financial results, you’d think the stock would gain more than it has. In the third quarter, revenue increased 15% year-over-year and earnings per share (EPS) rose from $1.55 to $2.12 – a 37% increase. These are solid results for Alphabet, and they were driven by the boom in cloud computing.

Thanks to its wide arsenal of AI tools, Google Cloud has become a popular option for businesses. One of the biggest drivers is that Google Cloud offers its customers access to leading GPUs and its in-house TPUs (Tensor Processing Units). When workloads are properly configured, the TPU can far outperform the GPU, significantly reducing the cost and time required for AI training. For many companies, using a service like Google Cloud is a more cost-effective way to develop AI models, which has led to its popularity.

In the third quarter, Google Cloud revenue grew 35% year-over-year, an acceleration from the 29% growth in the second quarter and the 28% growth in the first quarter. If this segment expands and reaches operational size, it could have a major impact on Alphabet’s overall financial position and make it one of its most important business segments.

Thanks to the cloud of the DOJ investigation, you can now buy Alphabet shares at a pretty reasonable price. At about 24 times forward earnings, it’s far cheaper than many of the big tech stocks it’s often compared to.

GOOGL PE Ratio (Forward) data from YCharts

A simple comparison for Alphabet would be its “Magnificent Seven” colleagues. These stocks make up the majority of the large technology sector and make great comparisons for relative valuation.

Data source: YCharts.

Alphabet is by far the cheapest company in this group, but performs just as well (if not better) than some of its competitors.

With this in mind, I think the bull case far outweighs the bear case and investors should take advantage of the opportunity to buy Alphabet shares. With the strength of its AI business, the company is on track to have a strong year in 2025, even with the US Department of Justice investigation still looming.