It wasn't so long ago that people were really concerned about Alphabet (GOOG +0.69%) (GOOGL +0.45%). The company was embroiled in lawsuits filed by the Justice Department alleging unfair practices, and ChatGPT posed a direct threat to Google's dominant search business.
But Alphabet shook those fears off. The legal threats are gone. Google's AI-powered search is proving to be popular, and Alphabet is having a fabulous year. It's the second-best performing member of the "Magnificent Seven" cohort of stocks, with a 48% gain that trails only Nvidia.
Alphabet announced its first-ever quarter of posting $100 billion in revenue in its third-quarter results on Oct. 29. And while the company got a lot of attention for its successes with Google Cloud and its planned spending on artificial intelligence (AI) infrastructure, I was most struck by Alphabet's results as an advertising cash-printing machine.
Image source: Alphabet.
Alphabet's advertising numbers
Make no mistake: Even in an AI-driven world, advertising is the heartbeat that drives the company. Google Advertising revenue was $74.18 billion for the quarter, totaling 72% of Alphabet's overall revenue of $102.34 billion. Google Advertising increased 12.6% on a year-over-year basis.
|
Segment |
Q3 2024 Revenue (in Billions) |
Q3 2025 Revenue (in Billions) |
Change |
|---|---|---|---|
|
Google Search and other |
$49.285 |
$56.567 |
14.5% |
|
YouTube Ads |
$8.921 |
$10.261 |
15% |
|
Google Network |
$7.548 |
$7.354 |
(2.5%) |
|
Google Advertising total |
$65.854 |
$74.182 |
12.6% |
The company's strong growth in Google Search advertising is particularly encouraging for investors, as Google is facing increasing pressure from generative AI chatbots, as well as platforms such as TikTok and Instagram. But Google Search has been able to maintain its dominant market share of 90% of global internet searches.
Google incorporated AI into its search engine, rolling out AI Overviews that appear at the top of a Google Search query. It also launched Google AI mode, which uses Google's Gemini chatbot to provide conversational answers to even complicated prompts.
"AI is driving an expansionary moment for Search," Alphabet CEO Sundar Pichai said in the company's call with analysts. "As people learn what they can do with our new AI experiences, they are increasingly coming back to search more. Search and its AI experiences are built to highlight the web, sending billions of clicks to sites every day."
Pichai said that AI Mode is now available in 40 languages and has more than 75 million daily active users.
Why Google Cloud is the icing on the cake
When you consider Alphabet's growing strength in search and advertising is only part of the company's growth story, you can see why Alphabet stock popped 4% after the company's earnings report. Analysts are also excited about the company's growth in Google Cloud -- a division that's becoming more important as companies and developers are turning to hyperscalers who can offer computing power powerful enough to train and run AI programs.
Alphabet plans to increase its spending on AI infrastructure from $85 billion to a new full-year estimate of $91 billion to $93 billion, with a "significant increase" in capital expenditures for 2026.
Google Cloud revenue was $15.15 billion for the third quarter, up 33.5% from a year ago. And the company announced that its Google Cloud backlog grew 46% from Q2, and now totals $155 billion.
NASDAQ: GOOG
Key Data Points
Chips and advertising are an unbeatable combination
The Google Cloud business is critical to Alphabet's future, and there are a lot of possibilities there. Google Cloud currently has a 13% market share, trailing both Amazon (30%) and Microsoft (20%). So, it has lots of room to grow. And Alphabet's powerful advertising business, now enhanced by AI and solidifying its dominance in an AI world, gives it the revenue it needs to invest in cloud computing.
Alphabet's price-to-earnings ratio of 29.8 and forward P/E of 27.3 are exceptionally reasonable considering that Alphabet is only one of four companies in the world with a market cap greater than $3 trillion. And all three of those other companies -- Nvidia, Apple, and Microsoft -- have valuations higher than Alphabet.
Based on the company's strong earnings performance, its advertising strength, the cloud potential, and the comparatively cheap valuation, Alphabet stock is a slam-dunk buy right now.
