I will post a complete earnings review on Mercado Libre tomorrow. It will cover the shareholder letter, presentation, conference call, other notes and my take on the quarter.

The detailed Alphabet Earnings Review in section two of this article is for paid readers. It provides an intricate overview of its quarterly financials, balance sheet, conference call and my take on the results. Upgrade below to see that and so much more content. Read the newsletter that Fortune 500 executives are reading.

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For now, I wanted to provide the financial overview. Some of the margin numbers don’t look good due to items such as foreign exchange. Other factors influencing profitability were broadly known and covered in the newsletter. They include credit portfolio growth, logistics network expansion and merchant fee reductions. Leadership is not currently focused on margins. They’re looking to fortify market share, grab more land, extend their competitive lead, and optimize for margins down the road. They know that’s the way to deliver maximum long-term shareholder value, as it's the same playbook they've frequently run throughout the decades. As I’ll get into tomorrow, I support these decisions despite the near-term pressures.

Aggressive growth investments in Brazil can be most clearly seen in the second margin chart below.

MELI trades for 47x forward EPS. EPS is expected to grow by 15% Y/Y this year. That will likely fall materially following this report. EPS is then expected to compound at a 43% clip over the following two years.

Two noisy notes to cover. The EBIT margin contraction was related to a $3.5B European Commission (EC) charge from online advertising antitrust battles. Without this, 9.4% Y/Y EBIT growth would have been 22% Y/Y and EBIT margin would have been 33.9%. On the other hand, net income benefitted from mark-to-market equity gains of $10.7B. That makes the large beat unimportant for that metric.

The company raised CapEx guidance from $85B to $92B. Aside from that, it called out growth headwinds from lapping the election and depreciation growth modestly above 41% for next quarter.

The company trades for 27x forward EPS. EPS is expected to grow by 23% this year, 8% next year and 14% the following year. I don’t think estimates will move much for 2026 or 2027, but EPS estimates will rise due to the equity investment help.

Full-Stack AI:

As I’ve been arguing for more than a year, Google is the best full-stack AI player. It is the only company that can build their own cutting-edge AI chips, offer world-class cloud infrastructure, boast top-ranked large language models (LLMs), and enjoy data from category leads across search, streaming, navigation and browsing. Models and tools are only as good as the data they’re trained on. The mega-cap has amazing models because it has better access to data and elite talent to use it. They own everything and can directly optimize performance across every part of their operations. These optimizations build on one another and create a faster pace of improvement vs. the field.

The formula is working. Gemini queries tripled sequentially, while monthly active users (MAUs) rose from 450M to 650M Q/Q. The model platform also added another 4M developer users to reach 13M. All of that usage inevitably entails performance work for Gemini to enjoy, extending its performance.

Search:

Overall query growth accelerated Q/Q thanks to AI Overviews and AI Mode. AI Overviews are picking up notable steam, which is most pronounced with younger generations that are most susceptible to switching to a competition. Great to see.

AI Mode continues to deliver explosive w/w growth out of the gates, as query volume doubled Q/Q and it reached 75M daily active users (DAUs). This growth is seen as largely incremental to overall query volume, considering these new tools expand the types of queries customers conduct. AI is boosting the search pie while the mega-cap takes advantage.

“Just stepping back broadly, I think AI overviews and AI mode are dramatically improving search. We can see it in user satisfaction, user quality and all other metrics… They apply across the universality of human needs. I think we are seeing it in breadth, and naturally, over time, that'll apply to commercial categories as well.” – CEO Sundar Pichai

Not only is AI creating new search volume, but monetizable volume as well. Commercial query volume (search with the intent to purchase) accelerated Q/Q (alongside overall volume) and ad testing is now underway for AI Mode. Furthermore, AI Overviews already monetize on par with traditional search as of last quarter – with plenty of upside remaining. Its newer AI Max ads tool leverages the family of Gemini models to augment search advertising precision and returns. Kayak is using this to boost conversion rates by 12%, while AI Max already has hundreds of thousands of customers overall. It’s the firm's “fastest-growing AI-powered Search ads product.”

One more note here. Paid click growth sharply accelerated from 4% Y/Y growth last Q to 7% this Q. This is notable because AI search matches consumers with more relevant and targeted links, which lowers the need to search through several pages. That is an overall click headwind, but it doesn't seem to be holding this firm back. Cost per click grew at a strong 7% Y/Y clip, as these more relevant links are more valuable for advertisers too.

Cloud:

Cloud is rocking and AI is a big reason why. 70% of cloud customers are using an AI product vs 65% a few weeks ago and its AI cloud product suite is already doing billions in quarterly revenue. Revenue from products built using its AI tools also rose by 200%+ Y/Y.

Cloud customer growth accelerated to 34% Y/Y and they’ve already signed more $1B+ deals this year than during all of 2023 and 2024 combined. These deals should sport a roughly similar margin to the cloud segment overall. Any way you want to slice the data… things look good. This growth trajectory and 82% Y/Y cloud backlog growth (46% Q/Q growth) show that Google’s full-stack approach is durably working and its claims to world-class compute and data center efficiency are real. It looks like things will remain full speed ahead, considering supply constraints are now expected to last through the end of next year at least.

YouTube:

YouTube is performing very well. Thanks to its NFL rights and increasingly broad content slate, it remains #1 in streaming. Gemini is adding to this momentum by unlocking key content discovery upgrades that make for a more personal, relevant and engaging experience.

For the large YouTube advertising segment, the brand-building ad product called Demand Gen is enabling YouTube to boost conversion rates by 40% for some advertisers. Furthermore, its interactive direct response ads now deliver $1B in revenue per year and its record-breaking exclusive NFL broadcast (for the Brazil game) sold out ad placements in a few weeks.

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Strong quarter for a world-class company that has clearly gotten its mojo back. Their positioning in AI over the long haul is second to none and all of their core segments are showing noticeable strength. Waymo is rapidly joining the party and Wiz hopefully will too if that deal closes. There's so much to like about this product suite. That didn't become true in the last few months. Sentiment just flipped. The EU fine held back profitability, but everything structural in this quarter was encouraging. Despite the multiple expanding from the mid-teens to 27x, I still view Alphabet as one of the most compellingly priced blue chips in the market. I have no plans to add to the position and certainly no plans to trim.