Why Alphabet Stock Cycled Higher Today
Key Points
Alphabet crushed on earnings last night, and Google Cloud revenue grew 34%.
Total sales growth was 16% for Alphabet, but capital expenditure is growing much faster.
Alphabet's AI investments are creating revenue growth, but at a high cost.
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Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock surged 5% through 11:45 a.m. ET Thursday after beating earnings forecasts last night.
Before its Q3 report, analysts forecast the Google parent company would earn $2.26 per share on sales of $100.1 billion. Alphabet actually earned $2.87 per share, and sales were $102.4 billion.
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Image source: Alphabet.
Alphabet Q3 earnings
Alphabet's revenue grew 16% year over year, driven by a 34% increase in sales from Google Cloud, the company's artificial intelligence division, where "the Gemini App now has over 650 million monthly active users." Other services revenue grew 14% overall, although search revenue climbed 15% and YouTube ads revenue grew 16%. Operating margins improved, and Alphabet translated its mid-teens sales growth into a 35% increase in earnings per share.
CEO Sundar Pichai summed up the results like this: "Alphabet had a terrific quarter, with double-digit growth across every major part of our business. We delivered our first-ever $100 billion quarter."
Is Alphabet stock a buy?
One thing that concerns me about Alphabet stock is the company's continued heavy spending on its AI business. Yes, the 34% sales growth there looks great, but it's coming at a high cost.
Operating cashflow at Alphabet grew 58% year over year in Q3, but capital spending (to build data centers and such) had to grow 85% to make that happen. So far this year, free cash flow at Alphabet is only $48.7 billion, barely above the $48 billion Alphabet generated last year.
So yes, revenues are growing, but FCF looks stuck. And with Alphabet on track to generate only perhaps $65 billion in FCF this year, the stock's trading for a price-to-free cash flow ratio of nearly 54. For me, at least, that's too high a price to pay for Alphabet stock.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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