Is Alphabet a Stock to Avoid or a Once-in-a-Decade Buy on the Dip?

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) shares slipped in early trading following the company's latest earnings report, and this is after a decline of about 20% from a peak back in May. So you may be wondering if you should approach this tech giant right now.

The positive point is this player is part of the biggest growth story driving the market today: artificial intelligence (AI). You may know Alphabet best for a tool many of us use every day -- Google Search -- but the company is also a developer and provider of a wide range of AI products and services. And its cloud unit is involved in the massive AI infrastructure build-out.

All of this has been generating tremendous growth for Alphabet, but at a price. And this price has made some investors hesitant about investing right now. Let's take a look at the full story and consider whether Alphabet truly is a stock to avoid -- or if, on the dip, it's offering investors a once-in-a-decade buying opportunity.

Image source: Getty Images.

90% of the search market

First, a quick look at Alphabet's role in AI. As mentioned, this company is best known for the Google platform that allows us to easily navigate the internet and find what we're looking for. Google Search has steadily maintained a 90% share of the market, and that has ensured Alphabet's ability to generate strong and reliable revenue growth through advertising. Advertisers know we spend a lot of time on Google, so that's where they go to promote their products and services.

Alphabet's work in AI has helped it improve the results of Google Search, and its Gemini AI is a ready assistant for all, keeping us on Google longer. All of this is likely to keep advertisers coming back and possibly spending more.

So, what exactly is Alphabet's AI work? The company has developed the Gemini family of large language models and has even designed its own chips, called TPUs. It offers these products, as well as those of others -- such as Nvidia -- through its cloud business, Google Cloud. Demand for capacity has been soaring, as other cloud players have also noted, and this has prompted each of these "hyperscalers" to pour investment into an infrastructure build-out to keep up and, in the future, continue serving AI needs.

Big tech is spending $700 billion

All of this has resulted in huge amounts of capital spending from companies including Microsoft, Amazon, and Alphabet. These cloud leaders, along with Meta Platforms, aim to spend more than $700 billion this year alone.

Now, the downside is that if spending happens quickly, as in the case of Alphabet, the company may see pressure on free cash flow. Alphabet disappointed investors in its third-quarter earnings report as it announced negative free cash flow of about $9 billion, deepening from negative $5.8 billion in the second quarter.

The company maintained its capex guidance range for the year of $195 billion to $205 billion but said it would significantly increase spending next year.

Meanwhile, Alphabet's revenue and net income missed analysts' estimates. That said, it's important to note that growth hasn't stalled; Alphabet's total revenue climbed 25% to $127 billion for the 13th consecutive quarter of double-digit growth. And Google Cloud revenue surged 103%, for its biggest gain ever, to more than $30 billion. All of this is amid strong ongoing demand for AI infrastructure and solutions.

Should you buy Alphabet stock?

So, considering all of this, is Alphabet a stock to avoid or a buy on the dip? Due to the depth of investment in the AI build-out, it's not surprising to see periods of negative free cash flow, and even earnings that miss expectations. Investors should look closely at quarterly results, but in the context of the long-term picture. Missing expectations in one quarter doesn't darken the long-term outlook, particularly when overall demand and growth are positive.

Of course, any slowdown in demand represents a risk for Alphabet and peers – investors should be comfortable with that idea before buying these stocks. Still, Alphabet continues to demonstrate that it's a leader in the AI space and has the financial strength to support its AI ambitions. And at 27x forward earnings estimates, down from nearly 34x just a few months ago, the price looks right. That's why, on the dip, Alphabet may be a once-in-a-decade buy for growth investors.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.