Exiting Alphabet

The valuation process behind our sale

Lately, there’s been some excitement on Alphabet’s business prospects, lifting its valuations from 22x forward P/E at the start of the year to 30x forward P/E today.

The purpose of this article is not to call the top on Alphabet’s shares, but simply a reality check on its valuations and to share my process and thoughts behind our sale of our Alphabet position, earlier today. As always, I could be very wrong. This is also our first sale of a Global Outperformers deep dived company (7 buys, 8 deep dives so far!).

This year, I’ve published three articles covering Alphabet’s business and fundamentals:

• The Alphabet deep dive: A 13,000-word deep dive into its business model, economics and valuations

• Alphabet’s Q1 2025 earnings reflections

• Big Tech’s Q2 2025 earnings update

I believe that every investment portfolio deserves some exposure to big tech due to their sheer growth and profitability, and I made the case for two: Alphabet and TSMC.

At the time of my purchase and deep dive, Alphabet traded at 19x forward P/E and I argued that a combination of earnings growth (11% 5-year annualised growth), multiples expansion (19x to 23x) and shareholder return in dividends and share buybacks ($305 billion) could lead to a 16% IRR on its shares over 5 years to 2029, an exit market cap of $3.9 trillion or $349 per share.

Alphabet’s shares have since accelerated far faster than I imagined to its current price ($324 per share or $3.9 trillion market cap today), meaning from its current price, we are currently at the 2029 exit price, with a potential return of just 8.43% (2% IRR) expected to 2029. In simpler words, I expect 0% return on its shares for the next 4 years.

(Click here to view my detailed Alphabet spreadsheet valuation model)

I try to keep my purchase and exit decision-making unemotional and straightforward, guided by four IRR hurdles:

• 15% IRR (purchase hurdle) - I purchase shares when I see a potential IRR of 15% over 5 years (typically a 3-6% weighting depending on the business quality, FX, among others).

• 20% IRR (addition hurdle) - If shares fall to a forward IRR of 20% without a change in facts, earnings or valuation multiple projections, I purchase more shares, averaging down.

• 6% IRR (reduction hurdle) - If shares increase, leading to a forward IRR of less than 6%, I aim to sell half of our position.

• 3% IRR (exit hurdle) - If there’s a further share price increase, leading to an IRR of less than 3%, I start exiting the investment. The pace of sales depends on how far we are from the investment end date. The further away, the faster the investment exit.

In a perfect world, I’m a firm believer in letting winners run and cutting losers quickly. The challenge, though, is that fundamentals, not share price action, determine true winners.

Alphabet’s valuation reality check

From my initial estimates, Alphabet’s shares currently have a projected IRR of 2% to 2029, assuming the initial projections prove accurate. Before concluding on this, it’s essential to compare the projections to the actual 2025 fundamentals and business prospects relative to initial estimates. I narrowed this decision to three key questions:

• Can Alphabet grow earnings and free cash flow faster than 11% annually in its base case scenario?

• Does Alphabet deserve an exit multiple higher than 23x P/E?

• Can Alphabet return more than $305 billion to shareholders over the next 4 years?

Earnings growth

Generally, Alphabet’s operating profits track its revenue closely, but the improved profitability in its cloud division has led to a sizeable margin expansion, and I expect that to continue for the foreseeable future, leading to a 34.6% EBIT margin by 2029, from 32.6% in 2024.

Overall, I expected Alphabet’s revenue to grow by 12.5% in 2025, and so far this year, it’s grown at 13.9%. The table below splits the revenue growth across the five major divisions, and as presented, Alphabet is tracking higher than my estimates in two divisions (cloud and subscription), in-line with search and YouTube ads and below Google Networks.

Google search, network and YouTube ads

The growth in the search, networks and YouTube divisions closely tracks the four KPIs Alphabet publishes, and from the table below, it’s clear that growth has mainly come from higher prices per click/impression. The 4% change in clicks is a sharp deceleration from pre-COVID years, when its growth was above 20% and reflects the additional competition posed by social media, LLMs & AI agents, and e-commerce for information discovery and broader consumer clicks.

That said, there have been lots of investments in ensuring each search query is more meaningful for customers, supporting the higher pricing to advertisers. These recent investments include AI overviews and AI mode, YouTube shorts, live sports and YouTube TV and further behind-the-scenes investments particularly for retail and financial services advertisers.

“In the U.S., we have seen strong and consistent week-over-week growth in usage since launch and queries doubled over the quarter” - Sundar Pichai, Q3 2025 earnings call.

“In the U.S., YouTube shorts now earn more revenue per watch hour than traditional in-stream on YouTube.” - Sundar Pichai, Q3 2025 earnings call.

Looking closer to YouTube, it seems there’s a growing preference for users to subscribe on the platform, rather than the freemium plan, and while Alphabet doesn’t split this number out, I suspect this was the main driver in the 20% growth in the Google subscriptions division.

On Google Network, my initial estimates suggested revenues to be broadly flat till 2027, before an annual -2% decline in 2028 and 2029. The -2% decline however came 3 years early!

I believe this segment is most at risk to AI (and Amazon’s rise), and the sharp decline of -5% during the third quarter and YTD is slightly worrying for fundamentals.

Finally, Google Cloud is the key division I underestimated across the six divisions. I estimated revenue here could grow by 25% in 2025, and a 21% CAGR to 2029, but early growth trends for the 9 months of 2025 show cloud is already exceeding this.

There were lots of case studies, investments and overall strategy overview during the three 2025 earnings calls, and it’s clear that there’s still a significant monetisation potential in cloud.

More impressive is the profitability, as cloud operating profits have already crossed the 20% EBIT margin mark (23.7% EBIT margin in Q3 2025), and as each quarter goes by, Google is increasingly closing the performance and profitability gap to the larger peers, Microsoft and Amazon.

Overall, while Alphabet’s performance has undoubtedly been impressive, I don’t think it justifies a sizeable increase in our base case scenario of 11% to 2029.

Costs and profitability

Compared to the revenue segments, my initial costs estimates were more out of touch with actual results with cost of sales growing slower than I estimated while SG&A and R&D expenses grew faster than my estimates (see table below).

As Google continually shifts priority from Google Network to its search and YouTube divisions, the share of traffic acquisition costs (TAC) will decrease (37.9% to 37% for 9M 2024 versus 9M 2025), but the depreciation expense (much covered in the news lately) led to a slower growth pace here.

In the SG&A segment, the higher-than-expected growth was due to a $3.5 billion charge from the European Commission, and while this wouldn’t certainly be the last of fines for Alphabet, I don’t expect fines of this scale to be recurring. Excluding this fine, Alphabet’s SG&A would have grown by 9.5%, more in-line with my 8% target.

Overall, its EBIT growth was 0.7% faster than my 2025 estimate of 13.7% which isn’t materially different from initial estimates.

Finally, as the table shows, the net profit estimate is quite different from the actual results, and the key reason for the difference here was the $21.8 billion gain in Alphabet’s private investments.

I view Alphabet’s other bets (Waymo, Verily) and private investments (SpaceX, etc) as an added optionality to the core investment thesis. Without these additional valuation gains, net profits would have actually grown in the mid-single digits.

Overall, Alphabet isn’t performing significantly different from my initial estimates and as a result, I will keep the existing earnings growth and shareholder capital returns estimates in line with earlier projections.

Earnings multiple

The final segment of valuing Alphabet today is the earnings multiple, and I remain of the view that a 23x P/E multiple best reflects a conservative valuation.

At current market valuations though, Alphabet is priced at 30x forward earnings, well ahead of its average of 24.8x forward P/E over the last 19 years since its IPO (see charts below).

Of course, one could argue that 23x is too conservative for one of the greatest businesses of all time, and I recognise investors will each assign varying exit multiples for Alphabet. That said, I’ve always found it more valuable for estimates to be more conservative.

Final thoughts

The purpose of this article isn’t to call the top or peak for Alphabet’s shares, and I recognise there’s a potential I might have misjudged Alphabet’s true earnings power and valuation multiple.

From the table below, Alphabet’s current share price breaches the 3% IRR hurdle, and at the market open earlier today, I exited our full investment in Alphabet.

Alphabet will certainly remain on our core watchlist; it’s a company I’ve studied deeply for the past 5 years and will continually remain a student of its business model and operations, and make updates to the valuation model whenever we have conviction based on facts and analysis to do so.