GOOG

Alphabet is firing on every fundamental cylinder. FY2025 revenue grew 15.1% to $403B while net income jumped 32.0% to $132B and diluted EPS rose 34.5% to $10.81 — net income outpacing revenue by more than 2x means margins expanded, not contracted, even as the company poured money into AI. Net margin is 32.8%, operating margin 32.0%, and ROE 31.8%, all elite for a business of this scale. The balance sheet is a fortress: liabilities/equity of just 0.43x against $415B of equity and $324B of retained earnings, and operating cash flow of $165B (+31.5%) funds everything internally. Revenue has compounded cleanly ($258B→$307B→$350B→$403B), so this is durable, profitable growth, not a one-off.

The central tension — and the reason this is a 'buy' not a 'strong conviction 5' — is the AI capex super-cycle. Capex surged 74.1% to $91.4B, and MD&A is explicit that management expects to 'significantly increase' infrastructure investment in 2026 relative to 2025, with depreciation, energy, equipment and network costs set to 'significantly increase' because serving AI 'require[s] more compute power than our historical consumer and enterprise offerings.' That cuts free cash flow to roughly $74B (OCF $165B less capex $91.4B) and will weigh on margins. The mix shift compounds it: cloud, subscriptions and devices carry 'generally lower' margins than advertising and are growing faster, and AI monetization 'may monetize differently... could affect revenue growth rates and margin trends.' Funding is now partly debt-financed — long-term debt exploded +327.7% to $46.5B, plus finance leases and 'backstops and guarantees' to infrastructure counterparties.