GOOGL: Why Google Will Thrive Despite OpenAI’s Rise

Introduction

Alphabet Inc. (NASDAQ: GOOGL), the parent of Google, is navigating one of its biggest competitive threats in years: the rise of OpenAI’s generative AI, exemplified by ChatGPT. This challenge comes amid heightened regulatory scrutiny of Google’s search dominance. Yet Alphabet’s recent performance and strategic moves suggest it can withstand these pressures and continue to thrive. In early 2024, Alphabet surprised investors by initiating its first-ever cash dividend alongside a strong earnings beat, signaling confidence even as it ramped up AI investments ([1]). By mid-2025, new AI-driven products and features helped drive double-digit revenue growth, reinforcing Google’s competitiveness in the AI race ([2]). Below, we examine Alphabet’s fundamentals – from its dividend policy and financial leverage to valuation and risks – to understand why Google is well-positioned to prosper despite OpenAI’s rapid ascent.

Dividend Policy & Shareholder Returns

Alphabet had long resisted paying dividends, preferring to reinvest in growth and return capital via share buybacks. This changed in 2024 when Alphabet announced its first-ever quarterly cash dividend of $0.20 per share, to be paid starting June ([3]). The move, coupled with a new $70 billion stock repurchase authorization, was widely seen as a sign of Alphabet’s maturation and confidence in its cash-generating ability ([1]). Even with this initiation, the dividend yield remains modest (around ~0.5%-0.6% annually), leaving Amazon as the only major tech peer without a dividend ([1]). Alphabet’s priority for shareholder returns still skews toward buybacks – for instance, another $70 billion repurchase was approved in 2025 ([4]) – which have the effect of quietly boosting earnings per share. With such robust cash flows, Alphabet can simultaneously invest heavily in innovation and return cash to shareholders. In 2024 the company generated $125.3 billion in operating cash flow while spending about $52.5 billion on capital expenditures, leaving a hefty free cash flow cushion ([5]). These cash flows comfortably covered roughly $7.3 billion of dividends paid from mid-2024 (plus tens of billions in buybacks) ([5]). Alphabet’s decision to start regular dividends underscores management’s optimism in its long-term earnings power, even as it aggressively funds artificial intelligence (AI) initiatives and other growth projects.

Leverage, Debt Maturities & Coverage

Alphabet’s balance sheet remains one of the strongest in the market. The company carries minimal debt relative to its scale, and maintains a substantial net cash position. As of year-end 2024, Alphabet had about $95.7 billion in cash, equivalents and short-term marketable securities on hand ([5]). Against this, total debt is modest – roughly $13 billion in face value of long-term notes outstanding, with only about $1 billion maturing in the near term ([5]) ([5]). In other words, Google’s cash reserves are nearly an order of magnitude larger than its debt, allowing it to easily fund operations and investments without reliance on external financing. The limited debt outstanding has staggered maturities (some tranches extending out to 2060) and was mostly issued at low fixed coupon rates ([5]). This conservative capital structure translates into negligible financial risk – Alphabet’s annual interest expense was under $300 million in 2024 ([5]), which is trivial compared to its ~$112 billion in operating income for that year. The interest coverage ratio is therefore extraordinarily high, and Alphabet could service its debt many times over even if earnings faced a severe downturn. Practically, the company’s fortress balance sheet and AAA-level credit profile give it strategic flexibility to weather industry disruptions or make big investments (such as AI infrastructure) without endangering shareholder returns. Alphabet’s ample liquidity and cash generation also underpin its new dividend: management has indicated it intends to continue quarterly dividends going forward, subject to board approval ([5]). Overall, low leverage and abundant cash mean Alphabet can focus on innovation and competition (even an AI arms race) from a position of financial strength.

Valuation and Comparative Metrics

Alphabet’s stock trades at a valuation that belies its market dominance and growth prospects. The company’s forward price-to-earnings (P/E) ratio is in the high-teens, around 18–19× forward earnings as of mid-2025 ([2]). This multiple not only trails that of major rivals like Microsoft and Meta Platforms, but also sits below Alphabet’s own historical average ([6]). In July 2025, Reuters data showed Alphabet’s valuation at “less than 20 times expected earnings, below both its historical average and those of peers”, suggesting potential upside if investor sentiment catches up to its fundamentals ([6]). By comparison, many large-cap tech peers (the so-called “Magnificent Seven”) command higher multiples – for instance, Microsoft’s forward P/E has been in the mid-20s, and NVIDIA’s far higher ([2]) ([7]). Alphabet’s relatively discounted valuation likely reflects caution around the risks we’ll discuss (from AI competition to regulation). However, the flip side is that Google’s core business remains immensely profitable – with net income rising 19% year-on-year to $28 billion in the latest quarter ([6]) – so investors today are paying a reasonable price for double-digit growth and a global franchise. On a cash flow basis, even after a surge in capital spending, Alphabet’s enterprise value to free cash flow remains attractive for a company of its caliber. It’s also worth noting that Alphabet’s forward price/earnings-to-growth (PEG) ratio appears reasonable given its resurgence in ad revenue growth (12%+ in search ads recently) ([6]) and the expanding contributions from Google Cloud and YouTube. All told, the market is not pricing Alphabet as exuberantly as some high-flying AI peers, which could provide valuation support as the company proves it can thrive in the AI era.

AI Competition: OpenAI’s Threat and Google’s Response

The advent of OpenAI’s ChatGPT in late 2022 sparked concerns that Google’s search empire could be undermined by generative AI alternatives. Indeed, by 2024 some analysts argued that OpenAI posed a more immediate threat to Google than even antitrust regulators, as users began turning to AI chatbots for information searches ([8]). Tools like ChatGPT (and Microsoft’s AI-enhanced Bing) demonstrated new ways to retrieve answers, potentially eroding traffic to Google Search ([8]). Former Google insiders noted that such AI offerings were “rapidly gaining ground” and encroaching on Google’s core territory, with partnerships (for example, OpenAI’s tie-ups with Apple) further challenging Google’s default status ([8]). Initially, Google’s response was seen as cautious and slower than OpenAI’s agile advancements ([8]) – the company took time to publicly launch its own chatbot Bard and AI-enhanced search features, wary of accuracy and reputational risks. This early hesitation contributed to a narrative that Google was on the back foot in the AI race.

However, over the past 18 months Alphabet has leveraged its deep resources to mount a formidable response. Google’s competitive advantages in AI are significant – even Microsoft has acknowledged Google’s edge due to its vast proprietary data (e.g. the Google search index and YouTube data) and its custom AI-optimized semiconductor chips that power machine learning at scale ([9]). Unlike startups dependent on partners, Google enjoys vertical integration from its Tensor Processing Unit (TPU) chips up through software and distribution channels (e.g. Android and Chrome), positioning it strongly in generative AI ([9]). Armed with these strengths, Google in 2023–2024 rapidly deployed generative AI across its product ecosystem. In Search, the company introduced “AI Overviews” – summarized AI-generated responses at the top of search results – which by mid-2025 were reaching 1.5 billion users per month ([10]). This massive scale integration of AI into search is something no startup can easily match, and it aims to keep users within Google’s platform by enhancing the search experience. Importantly, Google reports that these AI features are improving ad performance and user engagement, as the AI can better understand queries and context, thereby helping to serve more relevant ads ([10]). Alphabet’s CEO Sundar Pichai noted that AI-driven search tools have seen rapid adoption and help “soothe anxious investors” by fueling ad sales growth ([4]).

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Beyond search, Google has expanded its AI offerings with Gemini, a next-generation foundation AI model that rivals OpenAI’s GPT series, and begun opening these models via its Google Cloud platform for enterprise use ([10]). Google Cloud itself has become a key part of the strategy: not only is it developing in-house AI chips and models, but it’s also capitalizing on AI demand by selling cloud computing power to others. In a notable twist, OpenAI signed a landmark deal in 2025 to use Google as one of its cloud infrastructure providers, despite the two being competitors ([11]). This partnership with OpenAI – diversifying OpenAI’s reliance beyond Microsoft Azure – was hailed as a “triumph for Google Cloud” and underscores Google’s picks-and-shovels role in the AI boom (i.e. even if another company builds the hit AI application, Google can profit by renting out the computing capacity) ([11]). The result is that Google’s cloud unit saw re-accelerating growth of 32% in revenue as of Q2 2025, bolstered by demand for AI infrastructure and Google’s unique AI-related offerings ([2]). With YouTube and other platforms also incorporating more AI (for content recommendations, automation, etc.), Google is weaving AI throughout its empire.

Crucially, these efforts are paying off in the marketplace. By mid-2025, Google’s core advertising revenues had returned to healthy growth – Search ad sales jumped over 10% year-on-year even in a mixed economic climate ([2]) – suggesting that Google’s integration of AI is driving user engagement rather than driving users away. Dozens of Wall Street analysts have taken note: after a strong Q2 2025 report, at least 17 brokerages raised their price targets for Alphabet stock ([2]). While Google’s stock had underperformed some “Magnificent Seven” peers earlier in 2025, its AI-fueled rebound in results has started to close that gap ([2]). In short, Google is demonstrating that it can compete head-on with OpenAI by augmenting its existing products with AI, leveraging its unrivaled scale and data. The company’s strategy – defend the core (search/ads) with AI enhancements while diversifying into AI cloud services and partnerships – positions it to thrive even as generative AI transforms the industry. Alphabet’s own CFO expressed confidence that heavy AI investments are already “powering ad sales” and will enable long-term growth ([4]).

Risks and Red Flags

Despite its strengths, Alphabet faces several risks and potential red flags that warrant investor caution. Competition from generative AI is an ongoing threat – even if Google has responded, the landscape of how people find information is shifting. Smaller AI-driven rivals like OpenAI’s ChatGPT, Microsoft’s Bing (with OpenAI tech), and emerging startups (e.g. Perplexity) are attracting millions of users and even launching their own web browsers ([10]). Surveys indicate some users now turn to AI tools instead of traditional search, and there is a risk that over time Google’s share of search queries could erode. In fact, analysts predict Google’s share of U.S. search advertising will dip below 50% by next year (from well above that historically), as competitors like Amazon expand their ad businesses and generative AI alternatives siphon some queries ([12]). Any material loss of search market share or engagement would directly pressure Google’s main revenue engine. Additionally, regulatory and legal challenges remain a cloud over Alphabet. In August 2024, a U.S. federal judge ruled that Google’s longstanding practice of paying to be the default search engine constituted an illegal monopoly, energizing antitrust enforcement ([13]). While a breakup of the company was ultimately avoided, the case led to proposed remedies – as of late 2025, a judge ordered that Google stop certain exclusive default search deals and share more search data with rivals ([14]). Such remedies could open the door for competitors on platforms like mobile phones, potentially chipping away at Google’s distribution advantages over time. Europe has also been scrutinizing Google’s market power, and new regulations (like the EU’s Digital Markets Act) may force changes in how Google operates services like Android and Chrome.

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Another concern is the cost and effectiveness of Google’s massive AI investments. Alphabet is dramatically increasing capital expenditures to keep its AI lead – it boosted 2025’s capex budget to about $85 billion (up 60% from 2024) to build data centers and AI hardware ([6]). This surge in spending has had a short-term impact: for example, Alphabet’s free cash flow dropped by over 60% year-on-year in a recent quarter due to the heavy capex load ([6]). Investors are watching whether these investments will yield proportional benefits. In late 2024, Alphabet’s stock fell 8% in one day after its Google Cloud revenue came in lighter than expected and management acknowledged rising expenses – raising questions about AI’s profitability and execution ([15]). Google’s cloud division, while growing fast, briefly showed slower momentum and even reported a revenue miss, illustrating that success in newer segments isn’t guaranteed ([15]). Margins could face pressure if AI-related costs (such as running advanced models for search queries) stay high and competitive pricing for ads or cloud services intensifies. Additionally, Alphabet’s “Other Bets” segment (moonshot projects like Waymo autonomous driving) continues to lose around $4 billion per year with uncertain payoff ([5]). Persistent losses in these side ventures are a minor drag on earnings and have prompted calls for greater discipline or spinoffs, though they remain a small portion of Alphabet’s overall value. Finally, leadership execution is a focal point: 2024 saw a transition in the CFO role (as long-time CFO Ruth Porat shifted to a new role and a new CFO was appointed ([16])), and the ability of management to balance cost control with innovation will be closely watched by investors ([12]). In summary, Alphabet must navigate competitive and regulatory headwinds, and ensure its heavy AI spending translates into tangible returns – these are real challenges, even for a company of Google’s scale.

Open Questions and Outlook

Looking ahead, there are several open questions about Google’s trajectory in the age of AI. Can Google successfully monetize generative AI in search without cannibalizing its core ad revenue model? Google has begun integrating ads into AI-generated search results, but the long-term impact on user behavior and advertising budgets remains to be seen. The digital ad industry is evolving – traditional keyword-based text ads could be partially displaced by AI-driven formats ([17]). Market forecasts reflect this uncertainty and opportunity: U.S. spending on AI-powered search ads is projected to surge from about $1 billion in 2025 to $26 billion by 2029, indicating a huge new revenue pool up for grabs ([17]). Google’s challenge (and opportunity) is to capture the lion’s share of that growth. It will need to continually refine how AI answers and ads coexist – ensuring that AI responses keep users engaged and receptive to sponsored results, rather than bypassing them. Another question is whether user habits will fundamentally change. Thus far, Google Search traffic has proven resilient – even OpenAI’s CEO Sam Altman conceded that ChatGPT is “unlikely to replace Google” entirely in people’s routines. But if younger users increasingly prefer conversational AI interfaces or if rival ecosystems (like an AI-infused Apple search tool or Amazon’s Alexa) gain traction, Google will have to adapt its products to avoid being disrupted.

How regulators around the world will set the rules of engagement is another major unknown. Google’s ability to maintain default positions (e.g. on smartphones and browsers) and to use data across its services could be further curtailed by new laws or judgments. While the recent U.S. antitrust outcome stopped short of drastic measures ([14]), ongoing and future cases (in the EU, U.S. states, etc.) could impose fines or business practice changes that somewhat level the playing field in search. Any structural separation – however unlikely at this point – would be a game-changer. Investors will also be pondering the trajectory of Google Cloud and other growth bets. Can Google Cloud become a second pillar of profit, narrowing the gap with Amazon Web Services and Microsoft Azure? Alphabet has proven it can win marquee clients (even competitors) for its cloud, but sustaining >30% annual growth in a competitive cloud market is an open question. Lastly, innovation vs. efficiency is a balancing act: Google’s culture has long encouraged ambitious “moonshots,” but with the AI race on, the company may prioritize focus. How effectively Alphabet can convert cutting-edge AI research (from its DeepMind unit and others) into user-facing products will determine if it remains the leader or yields ground to specialized AI firms.

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In conclusion, Alphabet’s future will be shaped by its execution in a post-OpenAI world – but the company enters this chapter with formidable advantages: a durable core business, financial might, and a demonstrated willingness to reinvent its services with AI. While uncertainties exist around competition and regulation, Google has so far shown it can innovate its way through threats, much as it has in past paradigm shifts. For investors, the key will be watching those open questions play out. If Google can harness AI to enhance (rather than undermine) its business model, and if it navigates the external challenges prudently, GOOGL appears poised not just to survive the rise of OpenAI, but to prosper alongside – or even because of – the AI revolution.

Sources

  1. https://reuters.com/technology/google-parent-alphabet-announces-first-ever-divided-20-cents-per-share-2024-04-25/
  2. https://reuters.com/business/alphabet-jumps-ai-driven-spending-fuels-cloud-revenue-surge-2025-07-24/
  3. https://apnews.com/article/9b01fc1ab86b4ec56b763ae257a42f06
  4. https://reuters.com/business/google-parent-alphabet-beats-quarterly-revenue-estimates-2025-04-24/
  5. https://sec.gov/Archives/edgar/data/1652044/000165204425000014/goog-20241231.htm
  6. https://reuters.com/default/alphabets-ai-option-casts-tempting-spell-2025-07-23/
  7. https://moneyweek.com/investments/stocks-and-shares/tech-stocks-magnificent-7-investing
  8. https://reuters.com/technology/openai-is-bigger-threat-google-than-us-regulators-2024-08-08/
  9. https://reuters.com/technology/microsoft-singles-out-googles-competitive-edge-generative-ai-2024-03-14/
  10. https://reuters.com/business/alphabet-will-seek-reassure-investors-ai-rivals-step-up-competition-2025-07-22/
  11. https://reuters.com/business/retail-consumer/openai-taps-google-unprecedented-cloud-deal-despite-ai-rivalry-sources-say-2025-06-10/
  12. https://reuters.com/technology/alphabets-q3-revenue-growth-likely-slow-competition-pressures-search-youtube-2024-10-28/
  13. https://reuters.com/legal/us-judge-rules-google-broke-antitrust-law-search-case-2024-08-05/
  14. https://reuters.com/technology/what-comes-next-googles-antitrust-case-over-search-2025-09-02/
  15. https://apnews.com/article/57590db6f7db3b5aa5f4ab353e44a211
  16. https://reuters.com/business/healthcare-pharmaceuticals/eli-lilly-finance-chief-leave-company-2024-06-05/
  17. https://reuters.com/business/media-telecom/ai-driven-search-ad-spending-set-surge-26-billion-by-2029-data-shows-2025-06-04/

For informational purposes only; not investment advice.