With Alphabet (GOOG 1.69%) (GOOGL 1.66%) scheduled to report its fourth-quarter results on Feb. 4, it's a good time to take a look at the stock to see if shares are attractive today or not. Not only can this help investors decide what to do with the stock, but it can give them more context heading into the earnings report.
But with the stock soaring more than 70% over the last six months, is it too late to buy?
Maybe not.
The company is coming into the report with a lot to like. Not only has the tech company's stock price been surging, but Alphabet's last quarter included mid-teens revenue growth, accelerating growth in Google Cloud, and higher capital spending tied to technical infrastructure to support its fast-growing AI (artificial intelligence) initiatives.
Image source: Getty Images.
Here's a closer look.
Growth trends are improving
Alphabet's third-quarter revenue rose 16% year over year to $102.3 billion. That was a faster pace than the 14% revenue growth the company reported in Q2, when sales were $96.4 billion. And the company's third-quarter top-line growth rate also sits above Alphabet's full-year 2024 year-over-year revenue growth rate, when total revenue rose 14% year over year.
Supporting this growth, Alphabet's Google services revenue grew 14% year over year to $87.1 billion, driven by broad-based strength "across Google Search & other, Google subscriptions, platforms, and devices, and YouTube ads," management explained in Alphabet's third-quarter update. Notably, Alphabet's "search and other" revenue rose 15% to $56.6 billion, and YouTube advertising revenue increased 15% to $10.3 billion.
But Alphabet's AI-fueled cloud computing business was the star of the show. Third-quarter Google cloud revenue grew 34% year over year to $15.2 billion, building on the 32% growth it delivered in Q2. Even more, cloud profitability improved dramatically. Google Cloud segment operating income was $3.6 billion in the third quarter, up from $1.9 billion a year earlier.
And perhaps the biggest news of all for Alphabet bulls from the quarter? Google Cloud ended the third quarter with $155 billion in backlog (up 46% sequentially and 82% year over year).
Big growth requires big spending
The backdrop for these accelerating trends, however, is heavier spending. Alphabet's third-quarter capital expenditures were about $24.0 billion, up from about $13.1 billion in the year-ago quarter. And management raised its 2025 capital spending outlook to between $91 billion and $93 billion, up from an earlier expectation of about $85 billion.
Alphabet's huge spending is aimed at the big opportunity it sees in Google Cloud, driven by booming demand for AI. In Q3, for instance, management said that the majority of its capital spending was directed toward technical infrastructure, including servers, data centers, and networking equipment.
Of course, demand for AI isn't just coming from Google Cloud customers; it's also coming from within Alphabet's own business. Management said in the company's third-quarter earnings call that its own AI Mode, built into Google Search, now boasts more than 75 million daily active users in the U.S. alone, with "strong and consistent week-over-week growth in usage since launch, and the queries doubled over the quarter." In addition, management said in its third-quarter update that its Gemini app now has more than 650 million monthly active users, with queries increasing threefold in just three months.
NASDAQ: GOOGL
Key Data Points
In short, investors should expect massive spending from Alphabet. But this spending is justified. Alphabet is seeing extraordinary growth in AI demand, evidenced by both its soaring Google Cloud backlog and rapid growth in areas of its own business where it's integrating AI.
But is all this excitement already priced in? With a price-to-earnings ratio of about 32 and a forward price-to-earnings ratio of 29, shares aren't cheap. But they're not too pricey either. For a company of its caliber, this may be a good entry point into the stock.
Of course, there are some risks investors should keep in mind. Starting with Alphabet's big spending, this could be a huge drag on the tech giant's business if the resulting growth from these investments isn't as strong as expected. Additionally, there's always the risk that the economics of Alphabet's AI-powered services won't be as good as expected over the long haul.
Overall, though, Alphabet looks like an attractive stock for investors with a high risk tolerance and for those willing to hold for the long haul.
