Alphabet Shares Are Down 10% Since Earnings. Is the Stock a Buy?

Alphabet released its third-quarter earnings report on Oct. 28. Here’s Morningstar’s take on Alphabet’s earnings and stock.

Key Morningstar Metrics for Alphabet

• Fair Value Estimate
  : $450.00
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Alphabet’s Q3 Earnings

Alphabet’s third-quarter results included sales growing 25% to $128 billion. The firm’s operating margins expanded 130 basis points to 31.8%. Google Cloud sales grew 103% to $31 billion, and now constitute 24% of the firm’s top line, up from 15% a year ago. But shares tumbled following the report as investors worried search sales growth decelerating from 17% to 12% signaled trouble in the search advertising business.

Why it matters: Alphabet’s overall business continues to be boosted by artificial intelligence.

• Alphabet’s main AI beneficiary, without a doubt, is its cloud business. Not only is the segment’s growth stellar, its backlog, or future contracted revenue, is five times annualized quarterly sales, providing the business great visibility as it invests in AI infrastructure.
• Within cloud, we see TPUs, Alphabet’s AI accelerators, as a key differentiator. As Alphabet moves from renting out TPUs to actually selling them to external customers, including Anthropic and recently Oracle, we expect Google Cloud revenue to meaningfully inflect upward.

The bottom line: We raised our fair value estimate for wide-moat Alphabet to $450 per share from $433, and continue to view shares as attractively priced. We believe that investors are underappreciating the breadth and depth of Alphabet’s AI monetization and the rapid upcoming growth in Google Cloud.

The following are excerpts from Morningstar’s company report on Alphabet.

Fair Value Estimate for Alphabet Stock

With its 5-star rating, we believe Alphabet’s stock is significantly undervalued compared with our long-term fair value estimate of $450 per share. We forecast Alphabet’s top line growing at a 20% compound annual growth rate over the next five years. We view Google Cloud as a key growth driver, and project sales to grow 51% annually on average over the next five years as cloud migrations, increased usage of AI, and additional software add-ons all work together to bolster the firm’s cloud sales. We foresee a slight expansion in Alphabet’s operating margins over the next five years.

Read more about Alphabet’s fair value estimate.

Economic Moat Rating

We believe Alphabet merits a wide economic moat, owing to the intangible assets, network effect, cost advantage, and customer switching costs that permeate a variety of businesses that it owns.

We assign a wide moat rating to Alphabet’s premier offering, Google Search. This general search engine has built significant intangible assets, primarily via its brand, and a potent network effect that allows Alphabet to be the dominant player in the GSE space.

We assign YouTube a wide moat rating owing to the business’ strong network effect and intangible assets. We believe Google Cloud merits a wide moat supported by high customer switching costs and cost advantages.

Read more about Alphabet’s economic moat.

Financial Strength

We view Alphabet’s financial position as healthy. The firm closed 2025 with cash and cash equivalents of $127 billion, more than offsetting its debt balance of $46 billion.

The firm’s advertising business is a cash-generating machine, churning out tens of billions of dollars in free cash flow annually. While AI investments are expected to eat materially into those cash flows, we expect the firm’s cash flow generation to inflect upward as AI demand drives sales and cash flows higher over time.

Read more about Alphabet’s financial strength.

Risk and Uncertainty

We assign Alphabet an Uncertainty Rating of Medium. This reflects our belief that despite the near-term uncertainty around potential competition in the AI-infused search market, Alphabet is well positioned to expand its overall business while maintaining a rock-solid balance sheet.

Alongside antitrust, Alphabet’s key area of uncertainty is AI. The firm has invested, and continues to invest, considerable capital in new technologies like generative AI. While we view these investments as value-accretive, especially considering the myriad ways Alphabet can monetize its technological know-how in AI, we view them as adding more uncertainty to the range of possible outcomes for Alphabet’s top line and profitability in the future.

Read more about Alphabet’s risk and uncertainty.

GOOGL Bulls Say

• Alphabet’s core advertising business is deeply entrenched in advertising budgets, allowing the firm to benefit from a secular increase in digital advertising spending.
• The firm’s diverse revenue streams, from consumer-facing products to enterprise solutions, allow it a wide monetization surface area, insulated from weakness in a particular product.
• Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.

GOOGL Bears Say

• While Alphabet is seeking to diversify its business away from search, text-based advertising remains the largest contributor to the firm’s top line, creating a concentration risk.
• Alphabet’s continued investments in new, often unproven technologies have been a drag on cash flows. The firm’s Other Bets continues to lose cash, with uncertain revenue outcomes.
• Alphabet’s capital expenditures are inflecting upward as it invests heavily in AI. While AI demand is real, Alphabet’s value capture opportunity could be lower than its AI investments.

This article was compiled by Colin Laidley.