Is Google Parent Company Alphabet Stock Too Cheap to Ignore Right Now?

Even the most enthusiastic artificial intelligence (AI) bulls seem to be putting on the brakes recently. Investors are starting to realize that more and more money is being poured into AI development, and the results remain to be seen.

Exhibit No. 1 this week is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). The Google parent company surprised and worried the market when it raised its AI spend outlook for the year to $200 billion at the midpoint for 2026. That jaw-dropping figure sent Alphabet stock plunging, despite what was a fantastic report, to its lowest P/E ratio ever.

At just over 16 times trailing-12-month earnings, is Alphabet stock too cheap to ignore?

Everything that's going right

When OpenAI first launched ChatGPT nearly four years ago, the market was concerned that Google would lose out as people migrated over to its platform and abandoned Google's search engine. With 90% dominance in search, Google seemed incredibly vulnerable.

However, the company capitalized on its lead by integrating AI into its platform, offering a wide range of options for search users, including quick AI results and AI mode. Not only did ChatGPT not render it obsolete, but Alphabet quickly pivoted and became an AI powerhouse.

Image source: Alphabet.

Today, hundreds of millions of people worldwide engage with Gemini, the company's large language model (LLM), in many forms, and the second-quarter results were chock-full of great news about its growth. There are now 950 million monthly active users of Gemini, which is a significant percentage of the global population.

Alphabet is launching a torrent of new products, like the recent rollout of Omni video creator, which launched in May and already has a 40% increase in its user base, and Antigravity 2.0, an agentic AI developer, which launched in May and has 2.4 million weekly active users.

These AI upgrades are in addition to the full Alphabet ecosystem, which includes a wide range of top businesses such as Google Search, YouTube, and Android. Total second-quarter revenue was up 24% year over year, including an 82% increase in cloud services revenue. Operating income increased 30%, and operating margin expanded by two percentage points to 34%.

What's going wrong

Alphabet is well-positioned to sustain its growth, but if its main opportunities lie in AI, it needs to invest to stay competitive. That's why it continues to raise its capital expenditure (capex) outlook, in line with most of its peers. It spent nearly $45 billion in the second quarter, double last year's spend, and posted negative free cash flow. Management raised its full-year spend outlook to $195 billion to $205 billion.

The market is losing patience with the ever-increasing capex spend when it's not backed up by available cash. There's a lot at stake, and the results might be a long time in coming; management is guiding for spending to increase further in 2027.

Alphabet is backed up by a range of successful, money-making businesses and is far from an unprofitable AI start-up. The stock is already ticking slightly higher as investors see the bargain here. It may be a slow road to recovery, but long-term investors can scoop up a bargain.

Jennifer Saibil 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.