Shares of Alphabet (GOOG 1.39%)(GOOGL 1.35%) are down about 7% from levels achieved earlier this month. The stock's pullback comes as many other tech stocks have declined. Investors are debating the implications of AI (artificial intelligence) on software, as well as tech giants' startling capital expenditure plans, including Alphabet's.
With shares of the Google, YouTube, and Waymo parent company down sharply in such a short period, is this a good time for investors to buy Alphabet stock? After all, the underlying business isn't performing poorly. Quite the opposite, actually. Alphabet's fourth-quarter results were exceptional, with accelerating top-line growth and very strong earnings-per-share growth.
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AI is a major catalyst for Alphabet
Alphabet's fourth-quarter revenue rose 18% year over year -- an acceleration from 16% growth in the prior quarter. Earnings per share climbed even faster, roaring 31% higher.
AI, it turns out, is helping Alphabet's business inflect.
"Overall, we're seeing our AI investments and infrastructure drive revenue and growth across the board," said Alphabet CEO Sundar Pichai during the company's fourth-quarter earnings call.
AI, Pichai explained, is not only serving as a catalyst for its compute business, Google Cloud, which saw revenue rise 48% year over year during the period and its backlog climb 55% sequentially to $240 billion, but it's also enhancing its core search business. Search, Pichai noted during the call, is seeing "an expansionary" moment, driven by AI, with more search usage in Q4 than ever before. Additionally, Pichai said that "AI is transforming the YouTube experience," with more than 1 million YouTube channels using its AI creation tools every day in December and more than 20 million viewers using its new Gemini-powered Ask tool for the whole month. And, of course, there's Alphabet's autonomous ride-sharing service, Waymo, which is now giving more than 400,000 rides per week.
Not to mention, Alphabet's generative AI app Gemini now boasts more than 750 million monthly active users.
With all this momentum in AI, it's no surprise that Alphabet is investing heavily in additional cloud computing infrastructure to support these initiatives.
The company expects to spend between $175 billion and $185 billion in capital expenditures in 2026. Alphabet chief financial officer Anat Ashkenazi said these investments will help the company build out additional compute capacity to support AI, improve its core Google services, address growing enterprise customer demand for compute, and more.
Robust and diversified growth
Solidifying the bull case for the stock, the AI inflection at Alphabet is building on an already well-diversified and robust business.
Of its $35.9 billion in fourth-quarter operating income, for instance, about 15% came from its fast-growing Google Cloud business. And its diversified mix of Google services, including Google search, YouTube, advertising across non-Google websites, subscriptions, platforms, devices, and other services, represented the rest.
Further, the company saw 17% year-over-year growth in both its "Google search and other" and "Google subscriptions, platforms, and devices" segments in Q4. Additionally, YouTube advertising revenue rose 9% year over year during the period.
NASDAQ: GOOG
Key Data Points
With AI poised to be a catalyst for not just Google Cloud but the rest of Alphabet's business as well, the tech stock's price-to-earnings ratio of about 29.5, as of this writing, looks quite attractive. Yes, the company's big spending may weigh on Alphabet's margins this year, but the investments it's making today will likely pay off for years to come, enhancing its competitive advantages and accelerating its long-term business growth potential. With this in mind, I think the stock's current valuation is fair.
Of course, there is a risk that Alphabet's AI investment doesn't achieve the returns management hopes for. If this happens, the stock could prove to be overvalued in hindsight. But given the company's long history as a good steward of capital, I think this will be a true inflection point for the company -- and the stock.
