Key Points
Alphabet's earnings looked strong last quarter, but there are still fears over AI's threat to Google Search.
Its cloud business is growing rapidly.
Shares look much cheaper than they did just a few months ago.
Shares of Alphabet (NASDAQ: GOOG) fell 17.5% last month, according to data from S&P Global Market Intelligence. The technology giant reported strong earnings for the quarter, but investors were concerned that Google Search could lose market share.
Here's why the stock fell in October, and whether it is a buy today.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
Growing revenues, but fears over Google Search
Third-quarter earnings looked rather stellar for Alphabet. Total revenue grew 25% year-over-year to $127.6 billion, Google Cloud revenue grew 103% year-over-year, and Google Search revenue grew 12% year-over-year.
Investors were concerned about two things: cash flow and Google Search usage. Alphabet spent $51 billion on capital expenditures in Q3, leading to negative free cash flow for the period. As it races to build out AI infrastructure, it may see negative free cash flow over the coming quarters, which could affect how investors view the stock.
Management said that Google Search had a record number of queries last quarter, its fastest rate of growth in the last five years. Still, investors are concerned about further market share losses to AI competitors like ChatGPT and Claude, as well as a decline in monetization from the traditional link-based search model. If Google's new AI overview feature is not as good at advertising as traditional Google Search, then the company may see a slowdown in revenue growth. Google Search is still Alphabet's largest revenue generator, with $63 billion in revenue last quarter alone.
Image source: Getty Images.
Is Alphabet stock a buy today?
Alphabet is trying its best to disrupt itself by replacing Google Search with its own AI model named Gemini. The Gemini app now has one billion users, which is an impressive feat of growth from a standing start just a few years ago. However, it is unclear how much revenue these users generate beyond the few who pay for upgraded subscriptions.
But ultimately, the most important thing is that users are still coming to Alphabet's properties. In the long run, they will likely find a way to monetize these users, whether through subscriptions or advertising.
Right now, Alphabet trades at a significantly cheaper earnings ratio than it did earlier this year. On an enterprise value-to-EBIT (earnings before interest and taxes) ratio, it trades at 21x earnings. For a company that is growing revenue at 25% annually, this looks rather cheap. If you believe Alphabet can maintain its Google Search revenues through new AI avenues and keep compounding sales through Google Cloud, the stock may be a buy here.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.