Seven months ago, I wrote a piece titled “Why It’s Premature to Cancel Google Search” (LINK). The tech commentary class had reached peak Google pessimism. ChatGPT was supposedly eating the world. Perplexity was the future. Traditional search was dying.
My thesis was straightforward: Writing off Google would be premature. Its competitors had their own problems—they needed viable business models while Google just needed to adapt. The valuation at the time reflected peak pessimism, while Google’s infrastructure and data advantages remained intact.
Q3 2025 results are in. Alphabet just reported its first-ever $100 billion quarter—$102.3 billion to be precise, up 16% year-over-year.
But here’s the kicker: Search didn’t just survive. It accelerated. Query growth accelerated. Commercial query growth accelerated even faster. And those AI features everyone said would destroy search economics? They’re monetizing at the same rates as traditional search while creating billions of net new queries.
When I shared with Steady Compounding Insider members that I was adding Google shares after Q2 (LINK), the setup was compelling—a world-class business being priced for disruption that I believed wouldn’t materialize.
But first, let’s set the scene with the bigger picture:
Source: Fiscal AI (get a 15% discount using this link)
Look at this chart carefully. Search revenue has tripled from $70 billion to $215 billion since 2017. Yet its percentage of total revenue declined from 63% to 56%. This isn’t disruption—it’s expansion. Google added $145 billion in Search revenue while simultaneously building multiple new $40+ billion businesses.
The Search Expansion Phenomenon
Let me be clear about what’s happening here: Google is both defending and redefining search simultaneously. Wall Street couldn’t comprehend this—they only saw win-lose scenarios. But sometimes the pie just gets bigger, and Google is doing a phenomenal job navigating this changing landscape.
Search revenue hit $56.6 billion, growing 15% year-over-year—that’s an acceleration from 12% in Q2. In a business this large, acceleration is remarkable.
Source: Fiscal AI (get a 15% discount using this link)
After bottoming at 9.8% growth in March 2025—when AI pessimism peaked—Search revenue growth has steadily climbed back to 14.5%. This is what adaptation looks like, not disruption.
AI Mode now has 75 million daily active users. Queries doubled during the quarter. Users are asking questions they never would have asked traditional search. And here’s the crucial part—it’s already driving incremental total query growth for Search.
The traffic data from SimilarWeb tells another compelling story—Gemini is rapidly gaining share in generative AI traffic, taking meaningful share from OpenAI. While OpenAI still dominates at roughly 70% share, Google is gaining ground in the consumer AI race.
During the earnings call, management revealed that AI Overviews and AI Mode are “creating more opportunities for monetization.” They’re not cannibalizing traditional search—they’re growing the pie. When someone uses AI Mode to plan a trip to Barcelona with complex multi-step questions, that’s not replacing one search. It’s replacing zero searches because they wouldn’t have bothered before.
Even more telling: paid clicks grew 7% (up from 4% in Q2) while cost-per-click also grew 7%. Google is getting both more volume AND higher prices. That’s not what disruption looks like. That’s what market expansion looks like.
Source: Fiscal AI (get a 15% discount using this link)
This chart breaks conventional search economics. Typically, when volume (paid clicks) increases, pricing (CPC) declines. But look at Q3 2025—both metrics at 7%. Google is getting more clicks AND higher prices. That only happens when search quality improves so dramatically that advertisers see better ROI.
The bear thesis assumed AI would commoditize search—that synthesized answers would eliminate ad opportunities. Instead, Google launched AI Max in Search, which became their fastest-growing AI-powered Search Ads product ever, unlocking “billions of net new queries” in Q3 alone.
The Cloud Profit Engine Roars to Life
If Search is the validation story, Cloud is the transformation story.
Cloud revenue reached $15.2 billion, up 34% year-over-year. But forget the revenue number for a moment. Look at what happened to margins: 23.7% operating margin, up from 17.1% a year ago. That’s not incremental improvement. That’s a business hitting escape velocity.
Source: Fiscal AI (get a 15% discount using this link)
In just six years, Cloud went from burning 75 cents on every dollar of revenue to generating 20% operating margins. This is operating leverage at scale. For comparison, AWS commands a 34.6% in the latest Q3 report. There remains plenty of room for margin expansion as it scales.
To put this in context: In just twelve months, Cloud went from barely profitable to generating $3.6 billion in quarterly operating income.
The backlog number should make everyone sit up: $155 billion, up 46% quarter-over-quarter. Not year-over-year. Quarter-over-quarter.
Source: Fiscal AI (get a 15% discount using this link)
The chart tells the demand story better than any metric. The 82% year-over-year surge reflects the accelerating demand for AI infrastructure.
They signed more deals over $1 billion in the first nine months of 2025 than in the previous two years combined.
But here’s what really validates the infrastructure thesis: Anthropic, one of Google’s main AI competitors, just announced plans to access up to one million TPUs from Google. Even direct competitors need Google’s infrastructure to compete. When your rivals become your customers, you’ve won a different game.
The AI revenue story is even more compelling. Products built on Google’s generative AI models grew revenue more than 200% year-over-year. Nearly 150 Google Cloud customers each processed approximately one trillion tokens with their models over the past year. This isn’t experimental anymore. It’s production scale.
Management revealed that 70% of existing Cloud customers now use AI products. Thirteen product lines each generate over $1 billion in annual revenue. This diversification wasn’t there two years ago.
The Widening Competitive Gap
Remember when everyone thought ChatGPT and Perplexity would kill Google? Let’s examine where we actually are.
Google is processing 1.3 quadrillion tokens monthly—that’s a 20x increase year-over-year. Gemini processes 7 billion tokens per minute via direct API use. The Gemini App has 650 million monthly active users. These aren’t defensive metrics. These are dominance metrics.
Meanwhile, let’s talk about the competitive reality. OpenAI, Anthropic, Perplexity—they’re all burning cash with no clear path to profitability. Their cost per query is unsustainable. They’re playing on easy mode because they don’t need to make money yet.
The Cloudflare development I mentioned in Q2 is worth revisiting. Cloudflare now blocks AI crawlers by default across tens of millions of websites—except for Googlebot. Publishers can’t afford to block Google because they’d lose search traffic. But that same Googlebot feeds Google’s AI products.
The result? Google maintains uninterrupted access to fresh web content while competitors must negotiate individual deals. This is the kind of moat that Sam Altman can’t buy—he can strike dubious creative deals for all the chips in the world, but he can’t purchase privileged access to the real-time web.
When competitors eventually need to monetize, what happens? They’ll need to show ads. They’ll need to make trade-offs between the best answer and the profitable answer, and be effective at generating returns for advertisers while not annoying the users. They’ll face the same challenges Google has already solved.
The infrastructure gap is equally daunting. Google’s custom TPUs, built over a decade, provide a cost advantage that’s measured in orders of magnitude. When you’re processing billions of queries daily, even small efficiency improvements compound into insurmountable advantages.
This quarter proved something important: the companies trying to disrupt Google don’t have a technology problem. They have a business model problem. And Google’s quarter shows they’re on track to solving both.
Understanding the Investment Cycle
Capital expenditures increased to $24 billion in Q3. They’re guiding to $91-93 billion for 2025, up from $85 billion. And they’re signaling a “significant increase” for 2026.
Google isn’t betting the house here. With their cash flow generation and balance sheet strength, they can afford these investments. In fact, I’d be more concerned if they weren’t investing aggressively given the opportunity ahead. The $155 billion Cloud backlog and Search’s reacceleration justify this spending.
Here’s what the critics miss: even with depreciation expenses up 41% year-over-year from these investments, operating margins would have expanded 150 basis points without the EC fine. The investments are generating returns in real-time.
Cloud margins expanded 650 basis points year-over-year despite massive infrastructure build-out. Search is monetizing new AI features immediately. The capital isn’t being burned—it’s building competitive advantages that compound.
Google has done this before. They built their own data centers when everyone said it was crazy. They designed custom chips when analysts called it a distraction. Each time, the “excessive” investment became the foundation for the next growth phase.
The Investment Conclusion
So where does this leave us?
The bearish thesis on Google Search has been thoroughly challenged by the data. Not only is Search not dying, it’s expanding. Cloud has reached profitability escape velocity. YouTube Shorts cracked short-form monetization. The infrastructure advantages are widening, not narrowing.
The company is growing revenue at 16% year-over-year. Underlying margins would have expanded 150 basis points excluding the EC fine, even with depreciation up 41%. They’re gaining share in AI while maintaining pricing power in Search.
After adding shares following Q2, Google was trading at a discount to its potential. After this quarter, the market might finally understand what’s happening here: Google isn’t just surviving the AI transition. They’re using it to expand their dominance.
The voices claiming Google would be disrupted by AI are getting quieter. The attention is now shifting to what they can achieve with AI as a catalyst rather than a threat.
Looking ahead to 2026, we have Gemini 3.0 launching, Cloud margins at 23.7% still trail AWS’s 34.6%—suggesting room for significant expansion—potentially another 1,000+ basis points as the business scales, and Search AI features still rolling out globally. The infrastructure investments being made today will power products we haven’t even imagined yet.
My thesis appears to be on the right track. Google hasn’t just adapted to AI. They’ve integrated it into their core business while maintaining what made them dominant in the first place.
Disclaimer: This research reports constitute the author’s personal views only and are for educational purposes only. It is not to be construed as financial advice in any shape or form. From time to time, the author may hold positions in the below-mentioned stocks consistent with the views and opinions expressed in this article. Disclosure – I hold a position in Alphabet at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).