3 Reasons to Buy Alphabet Stock Right Now
Key Points
Alphabet’s cloud computing segment is booming.
The company’s AI business also boasts significant opportunities.
Alphabet’s shares look like a great value at current levels.
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Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) stock hit an all-time high earlier this year, but it's been downhill ever since. Shares are currently down 11% year-to-date, even as the S&P 500 has gained 10%. What's going on with Alphabet? Many investors are worried about the company's significant spending on artificial intelligence (AI), and the tech leader's latest earnings report has exacerbated these fears, leading to a post-earnings dip.
Despite these challenges, Alphabet remains a great stock to buy and hold for the long term. Here are three reasons why.
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1. Cloud sales growth continues to accelerate
In the third quarter, Alphabet's revenue grew by 25% year over year to $127.6 billion. That came in below analyst estimates, and it is one of the reasons why the market's reaction to the company's quarterly update was negative. But it gets worse. Alphabet's net earnings per share dropped by 26% year over year to $2.12, while its free cash flow was a negative $9.1 billion, significantly worse than the (positive) free cash flow of $24.5 billion recorded in the prior-year quarter.
Alphabet is investing heavily, but the company's spending isn't yielding top-line growth in line with Wall Street's expectations, and earnings and free cash flow are declining rapidly. That's a bad combination. However, there was at least one bright spot for Alphabet: Its cloud computing segment, Google Cloud.
During the period, cloud sales came in at $30.7 billion, 103% higher than the year-ago period. It's worth highlighting just how much Alphabet's cloud sales have been accelerating in recent quarters.
| Quarterly Update | YoY Cloud sales growth |
|---|---|
| Q1 2025 | 28% |
| Q2 2025 | 32% |
| Q3 2025 | 34% |
| Q4 2025 | 48% |
| Q1 2026 | 63% |
| Q2 2026 | 82% |
| Q3 2026 | 103% |
Notice also that the jumps have gotten bigger since Q4 2025. Google Cloud is proving to be a major growth driver for Alphabet, and there is more to come. The company noted that Cloud backlog was $561 billion as of the end of the period, an increase of 262% year over year. The company expects to recognize 55% of that -- or about $309 billion -- over the next 24 months -- that's roughly eight quarters at an average of $38.6 billion per quarter.
This points to sustained demand for the company's cloud services, and by the looks of it, the company will continue to capitalize on it at least over the next few years. That's great news for investors.
2. The AI tailwind is just getting started
Alphabet's AI business is booming. It is helping boost cloud sales growth, for instance. Alphabet noted that demand for enterprise AI solutions contributed meaningfully to the performance of its cloud computing business. Alphabet is also making progress elsewhere. For instance, the company highlighted that the Gemini app now has reached one billion users.
This grants the company significant monetization opportunities, which it will seek to exploit in the coming years. Further, Alphabet has started selling its custom AI chips, and according to management, this business is experiencing strong demand and meaningfully contributing to the top line.
Custom AI chips can sometimes be cost-efficient for corporations, and as AI infrastructure spending continues to grow, demand for these chips could rise. That gives Alphabet yet another meaningful growth avenue. The company's AI-related investments may be harming profits and free cash flow now, but they could pay for themselves several times over in the medium term.
That's why the post-earnings dip is not justified, in my view, and represents a great buying opportunity for long-term investors.
3. The price is right
Beyond cloud and AI, Alphabet has plenty of opportunities. Its search business remains rock solid; it remains a leader in streaming thanks to YouTube; it has a promising autonomous-vehicle business with Waymo; and more. The company's outlook appears bright, and the stock looks fairly valued right now.
Alphabet is trading at 18x forward earnings, versus an average of 17x for communication services stocks. Alphabet is worth a much steeper premium given the company's prospects, and buying the company's shares at current levels could yield above-average returns over the next five years.
Should you buy stock in Alphabet right now?
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Prosper Junior Bakiny has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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