After Surging 15% in 1 Month, Does Alphabet Stock Have More Room to Run After Blowout Earnings?
Alphabet continues to deliver impressive results despite concerns that its dominant market share in search is under pressure.
Google Cloud is growing margins.
Alphabet is accelerating its capital spending.
10 stocks we like better than Alphabet ›
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) was so undervalued that it was the only "Magnificent Seven" stock that was cheaper than the S&P 500 in terms of the forward price-to-earnings ratio. But then, Alphabet shot up 15.2% in the month leading up to its second-quarter earnings report.
Stocks that run up into an earnings print will often give up some of those gains unless the report was exceptional. But Alphabet continued to climb higher after it reported earnings on July 23 -- a sign that Wall Street liked what it saw.
However, it's best not to take the market's reaction for granted. Here's where Alphabet stands, where it could be headed, and if the growth stock is a buy now.
Google Search and Gemini are holding their own
The primary reason Alphabet has been undervalued relative to other mega-cap growth stocks is a lack of conviction that its investments in artificial intelligence (AI) will yield sufficient returns to offset the potential decline in its existing core segments.
Alphabet has numerous moving parts, including Google Search, YouTube, Google Maps and Waze, Android, devices such as Pixel and Chromebook, Gmail and Google Workspace, Google Cloud, and "Other Bets" like Waymo. Despite a diversified lineup, the weight of Alphabet's success is still carried on the shoulders of Google Search.
In Alphabet's latest quarter, the company booked $96.43 billion in revenue, a 14% increase year over year (YOY). Google Search revenue came in at $54.19 billion -- an 11.7% increase YOY. Google Search is not declining; it is growing nicely and remains an integral part of the broader business despite worries that rival search and chatbot platforms would be eating into its market share.
The misconception that Alphabet is lagging behind AI may finally be changing. Not only are Google Search and the rest of Alphabet's services doing well, but Alphabet's AI investments are producing impressive results.
Gemini, the company's Chatbot, is powered by Google DeepMind. Gemini is multimodal, meaning it can process text, images, video, audio, and code. Gemini has 450 million monthly active users -- a 50% increase from the first quarter. For context, reports indicate that OpenAI's ChatGPT reached 800 million weekly active users in July.
Alphabet's ecosystem has been expanding in the image-to-video market. On the second-quarter earnings call, Alphabet said that Veo 3, its video generation model, has produced over 70 million videos since May.
Alphabet AI tools have free, basic versions, and more advanced subscription services that can be bundled with other offerings in Google One on a single customer and enterprise scale. So, investors should closely watch how Alphabet continues to monetize these tools and determine if they have the potential to eventually contribute to the company's bottom line.
Google Cloud is thriving
Google Cloud remains a distant third behind Amazon Web Services and Microsoft Azure. But it's still a value-adding piece in Alphabet's portfolio.
Google Cloud revenue jumped 32% in the recent quarter as Alphabet rolled out a flurry of AI infrastructure and generative AI solutions for customers. In the past, Alphabet's advertising, subscription platforms, and devices have acted as cash cows and were used to fund Google Cloud and Other Bets. But Google Cloud's profitability has been improving despite aggressive investment.
In the recent quarter, Google Services generated a 40.1% operating margin while Google Cloud had a 20.8% operating margin, which is a lot higher than the 11.3% operating margin in the second quarter of 2024. Alphabet is proving that it can keep expanding Google Cloud since it is the company's fastest-growing segment by revenue, while also allowing Google Cloud to continue to the bottom line.
Alphabet is so optimistic about the success of its AI endeavors and cloud that it is boosting its 2025 capital expenditures (capex) budget to $85 billion. Alphabet's second-quarter capex was $22.4 billion, and around two-thirds of that capex was invested in servers, and one-third went to data centers and networking equipment.
Alphabet is far from a stalwart that is past its prime. The success is reflected in Alphabet's results and its investments in technical infrastructure. Alphabet can afford to ramp spending without compromising its balance sheet or profitability.
Alphabet is still a great value
Alphabet isn't as dirt cheap as it used to be, but the stock is still undervalued because its earnings continue to grow fast enough to keep a lid on its valuation. Over the last three years, Alphabet's stock price has roughly doubled, but earnings have also soared 86.5%. So given the solid earnings growth, Alphabet's price-to-earnings ratio remains compressed at just 20.6 -- a discount to its 10-year median of 28.6.
When I look at Alphabet, I see a company that is showing measurable progress in AI, spending that is paying off, resilience in its legacy cash cows like Google Search and YouTube, and growth in cloud computing.
All told, Alphabet checks all the boxes of a foundational growth stock to buy now.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
After Surging 15% in 1 Month, Does Alphabet Stock Have More Room to Run After Blowout Earnings? was originally published by The Motley Fool
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