Alphabet (GOOG 1.63%) (GOOGL 1.67%) reported Q4 2025 results last Tuesday. Google's parent company eclipsed Wall Street's estimates across the board, with a 2.4% revenue surprise and 6.8% outperformance on the bottom line.
Image source: Alphabet.
Google Cloud was the star of the show. Sales rose 48% year over year to $17.7 billion, accounting for a beefy 15.5% of Alphabet's total revenues. The segment's operating income also soared, rising 154% to $5.3 billion.
These results show how Alphabet taps into the artificial intelligence (AI) boom. However, the stock took a dive after the report as investors focused on Alphabet's enormous AI infrastructure spending plans.
Was the price drop appropriate, or is Alphabet the best AI stock to buy right now? Let's take a look.
NASDAQ: GOOGL
Key Data Points
How big was Alphabet's drop, anyway?
As of Feb. 6, Alphabet's stock has fallen 6.5% since the Q4 report. The stock is trading at prices not seen since Jan. 20, also known as "a couple of weeks ago." So, it's not a massive price cut, but still a deep enough drop to raise eyebrows. With a $3.9 trillion market cap, Alphabet lost about $250 billion of market value in three days.
When giants stumble, Wall Street shakes. However, Alphabet remains the best performer among the "Magnificent Seven" stocks over the last year. The stock has gained 68%, far ahead of Nvidia's (NVDA 1.21%) runner-up jump of 47%.
Is the stock overvalued, then?
You can look at Alphabet's valuation from several angles.
- Equipped with a traditional value investor toolkit, you can call Alphabet fairly valued or even overvalued. The stock is changing hands at 30 times trailing earnings and 9.6 times sales -- a bit lofty but not terribly high in the tech sector.
- Adding earnings growth to the analysis, Alphabet still looks modest. The forward price-to-earnings ratio is 24x today, and the price/earnings-to-growth (PEG) ratio stands at 2.0. These growth-oriented metrics are on the uncomfortable side of fair.
- But what if the forward-looking earnings growth estimates are too conservative? The analyst consensus points to a five-year average of 12.3% per year, which is one of the lowest Magnificent Seven readings. That would be a significant slowdown from the current five-year growth rate of 30%, which sounds fair enough. Large and mature companies tend to slow their earnings growth in the long run, after all.
Alphabet has a history of accelerating its bottom-line growth over time, though:
GOOGL EPS Diluted (5 Year Growth) data by YCharts. EPS = earnings per share.
Adapt, evolve, repeat
Google Cloud has a lot of growing left to do, which is why Alphabet is doubling its capital expense budget in 2026 in the first place. And this fast-growing business segment's operating margin nearly doubled over the last year, from 17.5% to 29.9%.
I can't guarantee that Alphabet's stock will beat the other Magnificent Seven tickers in 2026 or over the next three years. But I'm convinced that the analyst community should give Alphabet's growth prospects more credit.
So, yes, I think Alphabet belongs at the top of any serious AI stock watch list. The company has spent two decades turning data into dollars, and Google Cloud is the latest proof that the playbook still works. Growth investors get a cloud business that's just hitting its stride; long-term holders get a company that knows how to evolve.
That's a combination I'm happy to buy at Alphabet's current valuation.
