Alphabet Just Posted a Monster Quarter. The Stock Dropped Anyway. Time to Buy the Stock?
Key Points
Alphabet reported 24% revenue growth, 82% Cloud growth, and beat estimates across the board.
Shares dropped 7% after management raised capex guidance by $15 billion, raising concerns about cash burn.
With shares trading at 21.3 times forward earnings and Cloud backlog at $514 billion, valuation-sensitive investors may see this drop as a buying opportunity.
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Shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) fell 7% as of 10:50 a.m. ET on Wednesday, pushing the price back to mid-April levels. The reaction seems disconnected from the actual Q2 results the Google parent reported last night: revenue grew 24% to $119.8 billion, Google Cloud surged 82%, and the company beat estimates across the board.
Image source: Alphabet.
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The results were excellent
Alphabet's Q2 success was broad. Google Cloud revenue jumped 82% to $24.8 billion, with operating margins nearly doubling to 35.6%. Nearly 500 Gemini AI enterprise customers each processed over a trillion tokens in the past year. The backlog stands at $514 billion. And the "legacy" business is still thriving, too. Search revenue rose by 17%, defying bearish predictions that AI chatbots would eat Google's search-and-ads lunch.
I see why some shareholders are backing away from Alphabet's massive AI investments. Management raised the full-year capex guidance to $195-$205 billion, $15 billion above the previous range. 2027's data center construction bill will be even higher. The company is tapping into cash reserves and taking on new debt, as free cash flow turned negative in the second quarter.
The market is pricing in execution risk on those infrastructure investments. That's not unreasonable; $200 billion is a lot of concrete and silicon, even for a tech titan of Alphabet's stature.
The opportunity
Here's the thing: the spending isn't speculative. Customers are lining up faster than Alphabet can build data centers. Management is renting third-party compute capacity from Space Exploration Technologies (NASDAQ: SPCX) just to keep up with immediate capacity shortages. That's not a company guessing about future returns; it's a business pulling every available lever to fulfill existing orders.
Trailing P/E is distorted right now by $99 billion in paper gains from Alphabet's SpaceX stake, which began in 2015. But forward P/E sits at 21.3 times, modest for a Magnificent 7 company growing revenue at 24% with a half-trillion-dollar backlog.
For investors willing to look past near-term capex anxiety, this sell-off may represent an opportunity to buy a dominant AI infrastructure franchise at a reasonable valuation. The spending is chasing confirmed demand, not speculative bets.
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Anders Bylund has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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