Alphabet Stock Surges After Third Quarter Earnings Report: Is It Worth Buying?

Alphabet's stock has seen a notable rise following an impressive earnings report for the third quarter of the year.

Despite Halloween being recently over, the stock market is exhibiting some unsettling trends. The general state of the markets has been marked by considerable red, raising concerns among investors.

As the third-quarter earnings season kicks off and with the presidential election approaching, significant uncertainty is causing various sell-offs across the stock market, which many don't find reassuring.

However, one stock that has been performing admirably during this volatility is Alphabet (GOOGL). Following a strong earnings announcement on October 29, its shares surged by as much as 10%.

In this analysis, we'll delve into the major highlights from Alphabet's third-quarter earnings and assess whether right now is a good time to consider purchasing shares.

What is Boosting Alphabet's Stock Price?

For the quarter ending September 30, Alphabet reported revenues totaling $88.3 billion, showing an impressive year-over-year increase of 16% when adjusted for constant currency. Its operating income also grew significantly, rising by 32% year over year to $28.5 billion, and the company generated a substantial $17.6 billion in free cash flow.

Alphabet’s core revenue and profitability largely stem from its vast advertising business, which is significantly driven by its Google search engine and its YouTube platform. Both Google and YouTube reported a 12% year-over-year growth in sales during the third quarter, boosted partially by increased advertising expenditures linked to the upcoming presidential election.

More subtly contributing to Alphabet's success are the advancements in its subscription services and cloud computing. Notably, the Google Cloud Platform (GCP) was the fastest-growing segment, with revenues rising 35% year over year to reach $11.4 billion.

Management credited this growth to advancements in generative AI, with CEO Sundar Pichai highlighting how the company’s "technology leadership and AI portfolio are helping us attract new customers and win larger contracts, while also deepening product usage by existing clients by 30%."

Alphabet is actively integrating AI across its wide range of services, including search, video content, productivity tools, and cybersecurity. This strategy is helping the company build a more cohesive platform that encourages users to adopt its AI-powered products and services throughout their operational frameworks.

Evaluating Alphabet's Valuation

When comparing Alphabet's forward price-to-earnings (P/E) ratio with its competitor, Microsoft, it becomes evident that investors are applying a higher valuation to Microsoft in contrast to Alphabet. Notably, Alphabet's forward P/E stands at 21.4, slightly below the S&P 500 index average, which is around 23. This could indicate that the market perceives Alphabet’s near-term returns as less attractive compared to the broader market.

Given Alphabet's impressive growth and its increasing footprint in the AI sector, these valuation discrepancies might seem surprising. However, there are underlying factors that may explain these valuation differences.

Factors to Consider

Although Google and YouTube remain highly trafficked platforms worldwide, Alphabet faces tough competition. Meta Platforms has approximately 3.3 billion daily active users across its various networks, including Instagram and Facebook, which presents lucrative advertising alternatives to Google and YouTube. Additionally, TikTok has gained immense popularity, particularly among younger users.

Furthermore, the introduction of ChatGPT’s new search tool could become a long-term challenge for Alphabet. Should ChatGPT successfully divert users away from Google, it could negatively impact Alphabet's advertising revenues. Another consideration is Microsoft's investment in ChatGPT, which may allow it to leverage its own search capabilities through Bing if users shift away from Google.

While Alphabet's stock may seem attractively priced at first glance, several uncertainties concerning the company's long-term potential may influence its valuation compared to peers.

So, is investing in Alphabet a wise move? On one hand, the company is making significant progress with its flagship products, driven by AI investments. On the other hand, the competition across its main revenue sources is becoming increasingly fierce.

For these reasons, I would hold off on purchasing Alphabet shares at this moment, but I will continue to watch its progress as the narrative around AI evolves.

Alphabet, Earnings, AI