Alphabet (GOOGL 2.18%) (GOOG 2.13%) continued to once again prove it's an artificial intelligence (AI) winner with growth accelerating in both its search and cloud computing businesses. While the stock is now up more than 50% on the year, it still looks as if it has plenty of upside potential ahead.
Let's take a closer look at the company's Q3 results and prospects and why I think the stock is still a buy.
Image source: Getty Images.
Growth accelerates
Google Cloud was once again the star for Alphabet in Q3. Revenue soared 34% (versus 32% growth in Q2) to $15.2 billion, while segment operating income surged 89% from $1.9 billion a year ago to $3.6 billion. The company said that 70% of its cloud computing customers now use its AI services.
The company also once again boosted its capital expenditure (capex) budget as the supply and demand environment remains tight. It now plans to spend between $91 billion to $93 billion building out additional data center capacity, up from a prior outlook of $85 billion. Alphabet also noted that it expects to see a significant increase in capex next year.
NASDAQ: GOOGL
Key Data Points
In its core search business, Google Search revenue climbed nearly 15% to $56.6 billion, which was an acceleration from the 12% growth it saw in Q2 and 10% growth in Q1. The company credited the revenue acceleration mostly to its AI Overviews and AI Mode, which are both driving queries. It noted that it had just added shopping capabilities in AI Mode and expanded its try-on capabilities.
YouTube also continues to perform well, with ad revenue climbing 15% (vs. 13% in Q2) to $10.3 billion. YouTube, along with Google One (cloud storage) and Music, also helped drive a 21% jump in subscription and device revenue to $12.9 billion. It said its recommendation system is helping increase the amount of time people watch videos on its platform, while Shorts continues to perform well.
Alphabet also continues to expand its Waymo robotaxi business and is looking to begin service in Dallas, Nashville, Denver, and Seattle. It is also expanding into international markets, including Tokyo and London.
Overall, Alphabet's total quarterly revenue rose by 16% (15% on a constant currency basis), to $102.3 billion. Earnings per share climbed 46% year over year to $3.10. The results easily surpassed analyst consensus estimates (as compiled by LSEG), which were looking for EPS of $2.33 on revenue of $99.9 billion.
Looking ahead, Alphabet said it was cautious on the advertising market in Q4, particularly with YouTube, as last year it saw a lot of political spending around the U.S. elections.
Why the stock remains a buy
Alphabet is currently firing on all cylinders, with strong growth in its key search and cloud computing businesses. YouTube, meanwhile, continues to perform well, and Waymo looks like it could be on the verge of being a big contributor down the line.
While there have been some concerns about the impact of AI on its search business, those should now start to be put to rest. Alphabet's AI Overviews and new AI Mode are helping drive queries, and it has a huge distribution advantage with its Chrome browser and Android operating system, together with its Apple search revenue-sharing deal. Its ad network, meanwhile, is already a proven winner, which will keep advertisers on its platform, and it also has a huge data advantage.
Google Cloud, meanwhile, continues to be a driving force. Its Gemini large language model (LLM) and custom tensor processing units (TPUs) continue to be big differentiators, and why the company is seeing such strong cloud demand. This business looks like it will have a long growth runway, and its strong free cash flow ($73.6 billion over the past 12 months) easily supports its spending.
While the stock is no longer the absolute bargain it was at the beginning of the year, it's still attractively valued. The stock trades at a forward price-to-earnings ratio (P/E) of around 27 times 2026 analyst estimates, which is the second cheapest valuation among Magnificent 7 stocks, behind only Meta Platforms.
Given Alphabet's strong collection of market-leading and emerging businesses, this is a stock you want to own for the long run.
