Google's amazing turnaround: From a "victim" of AI to a "pioneer" in AI
After the U.S. Eastern Time market closed on October 29th, Alphabet, the parent company of Google, released its financial report for the third quarter of 2025. After being re - evaluated for two months based on the full - stack AI logic against the backdrop of OpenAI's popularity, with limited direct repair space and the market urgently in need of reasons for further growth, Google managed to deliver excellent results to continue its re - evaluation journey.
Specifically, here are the core messages:
1. Stunning advertising performance: In the third quarter, both YouTube and search advertising grew by 15%, exceeding market expectations.
(1) Dolphin Research actually had some expectations that YouTube ads could outperform. Given that user activity growth led the entire industry, the market's growth expectation of only 12% was indeed a bit conservative. The growth drivers came from the ad loading rate of Shorts and the penetration of AI tools (such as automatically generated ads).
(2) Surprisingly, search not only did not slow down on a high - base, but also accelerated. There is even less talk about the issue of AI erosion. According to research, the growth drivers mainly came from the increase in search query volume driven by AI Overviews and AI Mode, which in turn led to an increase in display volume.
2. Sustained prosperity of Google Cloud: The cloud business now mainly depends on the accumulated unfulfilled orders (Revenue Backlog). As long as the order accumulation maintains a high growth rate, the cloud revenue growth can be maintained for some time in the future.
As of the end of Q3, the accumulated orders reached $155 billion, a year - on - year increase of 43% and a net increase of $47 billion quarter - on - quarter, excluding the recently reported $20 billion order from Anthropic. With these order inventories, the revenue growth rate can continue to remain above 30% for some time.
3. Other revenues such as subscriptions remain stable: Other revenues mainly consisting of YouTube membership subscriptions, Google Play, and Pixel hardware, etc., did not slow down as expected in the third quarter, with a growth rate of 21%. The company disclosed that the number of paid subscription users has exceeded 300 million.
YouTube TV leads the industry in viewing time, and its market share has been increasing. Content such as music also helps to promote the expansion of paid members. According to institutional estimates, the number of YouTube paid subscription members has reached 120 million. Given the user base of over 2 billion active users, there is still room for improvement in the paid - user rate.
Another driver of other revenue growth is Google One revenue. As Google integrates AI to launch more innovative features, it is expected to continuously attract user adoption.
4. Affiliate advertising continues to decline slightly: Affiliate advertising can be regarded as a victim of the search AI transformation. However, Google effectively controlled this impact within a certain range (the decline was within 5%). In the third quarter, it declined by 2.6% year - on - year, thus avoiding damage to the advertising ecosystem.
5. Profit efficiency improves after excluding fines: In this quarter, a $3.5 billion EU antitrust fine was confirmed, which affected the profit margin by 3 percentage points. After excluding it, the operating profit margin was 34%, showing an increase both quarter - on - quarter and year - on - year. The improvement in operating efficiency mainly relies on faster revenue growth. In terms of expenses, both sales and management expenses decreased or had low - speed growth, while R & D personnel costs and server depreciation continued to expand at an accelerated pace.
6. Share buy - back intensity slows down in the short term: In the third quarter, Google repurchased $11.5 billion worth of shares, a decrease of $2 billion quarter - on - quarter. In this quarter, the company actually paid out $2.5 billion in dividends. In addition, the company expects to pay a dividend of $0.2 per share based on the third - quarter performance, totaling approximately $2.4 billion. According to this trend, the buy - back plus dividend payout in the fourth quarter will be $15 billion, so the total annual shareholder return will only be $62 billion, with an implied yield of 2%.
7. Comparison of key indicators with expectations
Dolphin Research's view
After the release of antitrust risks and the temporary removal of regulatory concerns, Google embarked on the AI re - evaluation journey. Currently, simply from the perspective of valuation multiples (with a 5% increase in the performance expectation after the upward adjustment, and the latest market value corresponding to a 2026 valuation of 24.5x P/E), Google has completed most of its recovery journey.
The impetus for further growth, apart from following the market to increase valuation during the interest - rate cut cycle, would require even better performance on the already good fundamentals. Obviously, the difficulty level has increased.
However, before OpenAI finds a major commercialization weapon and while the management consciously starts to control next year's expenditures, we believe that Google can first enjoy a moderate and healthy premium brought by the tailwind of its AI - empowered business. The all - around player style of full - stack AI also enables Google to benefit from the industrial chain dividends of the supply - demand imbalance in computing power during the upstream infrastructure procurement period, and at the same time, it can reduce the group's costs through self - supply.
The company's limited expansion of capital expenditure in 2026 compared with the high - profile investment of other platforms, as well as the advantages brought by the long - term downstream vertical integrated full - stack AI of self - developed ASIC chips, are evident.
The reason why the expectation of search erosion has not been fulfilled is essentially that the competitors are not strong enough and Google's own ecosystem is powerful, which allows Google to make a relatively calm transformation.
Although Gemini has an insurmountable innate advantage gap with ChatGPT in terms of independent apps, from the perspective of the entire ecosystem, the gap between Gemini's monthly active users of 650 million and ChatGPT's weekly active users of 800 million is not that large. And Gemini's total processing volume has reached 7 billion Tokens/minute, which has exceeded ChatGPT's data of 6 billion Tokens/minute at the beginning of the month (it may have increased now).
In addition, the improvement of the business ecosystem, which Dolphin Research has always mentioned, is the biggest advantage of the existing advertising platform besides traffic, and it is also a key step that new AI entrants need to take.
The existing time window also allows Google to make a transitional transformation in search monetization. That is, for customers in fields that contribute significantly to monetization, such as retail e - commerce, the AI Overview on their search result pages does not lead to a decline in display positions.
AI competitors such as OpenAI have good large - model capabilities, but their product forms lack imagination and subversiveness, and the construction of their commercialization ecosystems still needs to be refined.
The recently launched AI browser by OpenAI shows that its product subversiveness is not up to par. If it just tries to imitate existing products by wrapping ChatGPT, the entry - point value will still remain in the hands of traditional giants that currently control the scenarios (Atlas commented in "Google: My Fate Is in My Own Hands, Not OpenAI")
Of course, both Google and other players such as OpenAI will continue to take actions. Besides the update of large models (GPT 6 and Gemini 3), the commercialization of leading AI products deserves close attention. Especially under the pressure of upstream interest - binding, OpenAI will be more eager to promote commercialization in 2026 ("All Are in the Same Boat, Is OpenAI a Magic Pearl or a Demon Pill?") , and during this process, the impact on existing giants such as Google may start to appear, so it is worth closely tracking. Dolphin Research will discuss the commercialization calculation and impact analysis of OpenAI later. Stay tuned.
Regarding the e - commerce instant payment function and the commission - based model on actual transaction volume that OpenAI has promoted and implemented, Dolphin Research temporarily reserves its opinion (comment on the instant payment function: "If OpenAI Wants to Profit, Who Will Suffer?")
According to the feedback from current advertisers, most of them are just curious about OpenAI's commercialization results. Some merchants may participate in the tests, but currently, it cannot be a must - have option in the mainstream advertising budget. Therefore, Dolphin Research believes that there is no need to have a negative impact expectation on Google for now, but it is indeed necessary to continuously follow up and observe, especially whether there are new subversive functional optimizations at the product level.
The following is a detailed interpretation of the financial report
I. Basic introduction to Google
Alphabet, the parent company of Google, has a wide range of businesses, and its financial report structure has changed several times. For those who are not familiar with Alphabet, you can first take a look at its business structure.
Let's briefly explain the long - term logic of Google's fundamentals:
a. The advertising business is the major source of revenue and contributes the main profit of the company. Search advertising faces the long - and medium - term risk of being eroded by in - feed advertising, and the high - growth streaming media YouTube is used to fill the gap.
b. The cloud business is the company's second growth curve and has turned profitable. The recent order - signing momentum has been strong in the past year. As advertising will continue to be dragged down by weak consumption, the development of the cloud business is becoming increasingly important to support the company's performance and valuation imagination.
II. Stunning advertising and cloud that lives up to high expectations
In the third quarter, Google's total revenue was $102.3 billion, a year - on - year increase of 15.9%, higher than expected. Among them, the advertising business, which is the core pillar and accounts for 73% of the revenue, increased by 12.6% year - on - year and accelerated quarter - on - quarter. Apart from the favorable exchange - rate impact (contributing 1 percentage point), the endogenous growth was also good, with a year - on - year increase of 14.7%.
In terms of revenue, both advertising and cloud performed well, and they both benefited from the development dividends of the upstream and downstream in the AI industry wave. In addition, subscriptions to YouTube and Google One were still eye - catching.
Specifically:
(1) Advertising: No impact of AI erosion has been seen yet
Advertising revenue in the third quarter was $74.2 billion, with an overall growth of 9.9%. The core search and YouTube both achieved a growth rate of 15%, including the favorable impact of the depreciating US dollar in the European market. In the third quarter, it temporarily emerged from the shadow of tariffs, and the advertising demand continued to recover.
However, the market was originally cautiously optimistic about Google mainly because of Amazon's withdrawal from Google Shopping ads and the impact of last year's high base. At the end of July, Amazon suddenly removed its Google Shopping ad placements in core regions such as the United States, the United Kingdom, Germany, and Japan. Its ad display share in the United States, the United Kingdom, and Germany dropped sharply from 60%, 55%, and 38% to 0% respectively.
The main contradiction between the two parties is that Amazon is dissatisfied with the continuously rising CPC of Google ads, which is 30% - 50% higher than Amazon's in - house ads, resulting in a declining ROI year by year. Through the optimization of its own AI recommendation system, Amazon has improved its in - house ROI. In addition, in the era of full - scale AI, data is a key competitive factor. After removing the ad placements, Amazon also cut off the data - acquisition channels for Google's AI shopping assistant and other AI agents to obtain product information.
However, after the removal, it was more unfavorable for Amazon itself. Competitors took the opportunity to seize Amazon's original ad positions, posing a threat to e - commerce transactions. Therefore, Amazon resumed its Google Shopping ad placements in regions other than the United States. In the United States, because Amazon has a wide enough reputation, it believes that it does not need to rely too much on external leading advertising platforms such as Google.
Actually, Google's better - than - expected performance is mainly driven by AI empowerment:
On the one hand, AI Overview and AI Mode in search have increased user activity, bringing Google's market share, which had dropped below 90% in the second quarter, back up. At the same time, Google has further activated the activity of the Gemini ecosystem through the new product Nano Banana.
In addition, the high penetration of Pmax in Google Shopping ads (close to 90% according to institutional research) has enabled almost all merchants to experience the improvement in recommendation conversion brought by Pmax.
