Alphabet Plummets After Earnings. I Think the Stock Looks Like a Genius Buy Now.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) just reported third-quarter earnings, and I thought the results were pretty good. However, the market did not. The stock sold off around 10% following earnings for a variety of reasons, but I think there's far more to the sell-off.

The market is being extremely shortsighted here, and that may be a perfect opportunity for investors to swoop in and scoop up shares at a sizable discount.

Image source: The Motley Fool.

Why did Alphabet's stock sell off following earnings?

One of the biggest reasons the market cited for selling off Alphabet stock following earnings was its free cash flow dipping into negative territory. The analyst community expects Alphabet's free cash flow to remain positive, but it reported a $9 billion free cash outflow for the quarter. The market wasn't thrilled with that, and the stock sold off.

However, I think that's ignoring the broader picture. Alphabet is spending whatever it can to invest in its AI computing infrastructure. Why? Just look at its Google Cloud growth rate.

Google Cloud is Alphabet's cloud computing platform, and it's where many AI start-ups are moving to run AI workloads. One of Alphabet's biggest clients is Anthropic, and that's because it can use Alphabet's impressive TPUs, or tensor processing units, custom AI chips with better cost-performance than GPUs when the workload is properly configured. TPUs are so popular that Alphabet is starting to sell them to external clients, helping boost their business.

Overall, Google Cloud's revenue rose a jaw-dropping 103% year over year to $30.7 billion. Its operating margin was also very healthy at 36%, up from 24% last year. In fact, Google Cloud is about half the size of its Google Search business, which grew at a 12% pace to $63.4 billis in Q3.

During its earnings call, Alphabet highlighted that it was struggling to monetize its results in AI mode, which contributed to lower revenue. The market didn't like that language, so it sold off the stock. However, this is completely missing the obvious.

Alphabet knows that growth in search is limited and the landscape is shifting with the rise of AI. However, it's spending as much money as it can to build out its AI infrastructure to continue its cloud computing growth. That's the real business unit investors should be focusing on here, and because the market isn't, it's time to take advantage of a major opportunity.

The sell-off opened up a buying opportunity

Alphabet has had its price-to-earnings (P/E) ratio affected by various investments, so using a different metric, like its operating P/E ratio, makes more sense. This year, Alphabet has seen its premium rise as the market has recognized it as an AI leader delivering strong growth. However, with the latest sell-off, that's no longer the case. After the sell-off, Alphabet is now trading in its normal valuation range.

GOOG Operating PE Ratio data by YCharts

I think that pretty clearly points to Alphabet stock now being back in the buy zone, and with the stock now 30% down from its all-time high, it's time to take advantage of the sale price.

The market is worried about AI monetization, but Alphabet has already shown investors a path forward: cloud computing. This should be the primary focus of investors and the market, but it's not right now. Eventually it will be, and when that time comes, Alphabet will be one of the top stocks to own. In the meantime, I think it's a perfect stock to buy on the dip, as it's well positioned to thrive over the next few years.

Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.