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SUMMARY
Parkev Tatevosian, CFA, analyzes Alphabet's recent financial performance, highlighting the company's robust growth in its search and cloud businesses. The discussion covers the impact of artificial intelligence on investor sentiment, Alphabet's advancements in chip technology, and updated cash flow projections.
MAIN POINTS
- Alphabet's quarterly financial results led to a significant increase in its stock price, outperforming other major tech peers.
- The Google search business grew by 19% as new AI features drove increased user engagement and search frequency.
- Alphabet's cloud segment revenue accelerated by 63%, surpassing $20 billion, with a backlog nearly doubling to over $460 billion.
- Alphabet's in-house chip development reached its eighth generation, and the company began selling its TPUs to third parties, marking progress ahead of competitors.
- Cash flow projections for 2026-2028 were lowered due to increased AI investments, but intrinsic value per share was raised to $384.
- Alphabet is considered fairly valued near its 52-week high, and the analyst maintains a buy rating, holding the stock in his portfolio.
DETAILED ANALYSIS
Alphabet's recent quarterly earnings report resulted in a notable surge in its share price, distinguishing it from other leading technology companies whose stocks did not experience similar positive reactions. A primary driver of this outperformance has been the resilience and growth of the Google search business, which expanded by 19% in the latest quarter. This growth is attributed to the successful integration of artificial intelligence features such as AI mode and AI overviews, which have increased user engagement and search frequency.
The concerns that AI would erode Google's search profitability and market share, which previously led to a discounted valuation, have proven to be overstated as the company continues to deliver strong results.
In addition to search, Alphabet's cloud segment demonstrated exceptional momentum, with revenue growing by 63% and exceeding $20 billion for the first time. The backlog for the cloud business nearly doubled to over $460 billion, and is considered higher quality compared to competitors like Microsoft and Oracle, whose backlogs are more heavily tied to OpenAI-related contracts. Alphabet's backlog is broader and includes significant hardware sales.
Notably, Alphabet has started selling its internally developed TPUs (Tensor Processing Units) to third parties, a move that underscores the company's advanced position in chip development relative to other hyperscalers such as Amazon, Microsoft, and Meta. Alphabet's chips are now in their eighth generation, reflecting years of iteration and performance improvements.
Despite the robust performance, Alphabet announced increased capital expenditures for AI development, leading to downward revisions in near-term cash flow projections for 2026 through 2028. However, these investments are expected to yield higher cash flows from 2028 onward. The intrinsic value per share was raised by $10 to $384, aligning closely with the current market price, which is near the company's 52-week high.
The stock is viewed as fairly valued, but given Alphabet's consistent execution and leadership in technology, it remains a compelling long-term holding, and the analyst reiterates a buy rating.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Discounted access to Fiscal.ai, a primary data source for investment research.
- Subscribe to Parkev Tatevosian's free monthly newsletter on Substack.