The aggressive spending on artificial intelligence (AI) infrastructure has shaken Wall Street this year. Alphabet (GOOG +0.53%) (GOOGL +0.45%), Microsoft, Amazon, and Meta Platforms are collectively expected to spend up to $700 billion this year on chips and data centers, leading to concerns that the spending will eat into those companies' free cash flow. It's a fair question to ask whether these companies will be able to recoup their investment, particularly since much of their spending goes toward chips that could be outdated in just a couple of years.
Alphabet, which is expected to spend up to $185 billion this year on cloud infrastructure, is one company whose stock price has suffered. Over a one-week period from March 20 to March 27, the stock fell by nearly 10% as analysts projected negative cash flow for the company this year.
Alphabet is also expected to show slower earnings growth when it reports first-quarter results on April 26.
Is this the beginning of a long-term swoon for Alphabet? I don't think so -- in fact, I believe this is a golden opportunity to buy Google stock at a discounted price.
Image source: The Motley Fool.
Alphabet has a huge advantage
First things first -- even if it wasn't for AI and the promise of cloud computing, I would be an Alphabet stock bull. The company is uniquely positioned because it has a massive market share in the most important parts of the internet -- search and browser.
Alphabet currently has 89.8% market share for its Google search engine and 66.7% market share for its Chrome browser. That, combined with the company's YouTube video-sharing platform, gave it an incredible $82.2 billion in advertising revenue in the fourth quarter, up from $72.4 billion in the fourth quarter of 2024. In all, Alphabet posted revenue of $113.8 billion in the quarter in revenue, up 18% from a year ago. That means Alphabet gets more than 72% of its revenue from advertising.
That immense margin gives Alphabet a big advantage over other internet companies -- at the end of the year, it had $126.8 billion in cash and cash equivalents. And it's why I'm not terribly concerned that its free cash flow, which was $24.5 billion at the end of the last quarter, could dip into the red this year.
Alphabet's AI spending will be about double the $91.4 billion that it spent in 2025, but management believes that it's needed to keep up. In fact, CEO Sundar Pichai says he's more concerned about AI capacity than the company's investments in artificial intelligence.
NASDAQ: GOOGL
Key Data Points
"I think specifically at this moment, maybe the top question is definitely around compute capacity [and] all the constraints -- be it power, land, supply chain constraints. How do you ramp up to meet this extraordinary demand for this moment, get our investments right for the long term, and do it all in a way that we are driving efficiencies and doing it in a world-class way?" he said.
The outlook for Alphabet stock
I think this is a great buying opportunity for Alphabet stock as the company uses its massive cash reserves -- as well as a $32 billion bond sale in February -- to compete in the AI space. And the market sees it the same way -- of 68 analysts surveyed by Yahoo! Finance, 61 have buy ratings, and none recommend selling.
Alphabet stock may have a rocky few weeks as investors weigh their risk tolerance, but for long-term investors, Alphabet is a slam-dunk buy right now.
