Key Points
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Alphabet shares have struggled this year, but they got a boost after strong second-quarter earnings.
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The company’s Q2 revenue, net income, and EPS have all risen year over year, but so have capital expenditures.
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Management is investing heavily in artificial intelligence, which has been a key factor in its business performance.
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Shares of Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have delivered lackluster performance this year. The stock is up less than 2% through July 31. Contrast this to digital advertising and AI rival Meta Platforms, which saw shares jump over 30% in that time.
However, after its second-quarter earnings report beat Wall Street expectations, Alphabet stock began to climb and is hovering not far from the 52-week high of $207.05 set in February. The recent resurgence could signal a turning point.
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As a result, now is a good time to evaluate whether an investment in Alphabet makes sense. Doing so requires digging into where the tech giant stands today.
Image source: Getty Images.
Alphabet’s recent performance
Excellent second-quarter results understandably boosted its stock. Revenue was up a strong 14% year over year to $96.4 billion. Net income rose to $28.2 billion, a 19% increase compared to 2024.
Consequently, diluted earnings per share (EPS) soared 22% year over year to $2.31, exceeding Wall Street’s consensus estimate of $2.18. While this growth is impressive, a key reason to consider investing in Alphabet is its success in artificial intelligence (AI).
According to CEO Sundar Pichai, Google’s search traffic is growing year over year, “and our new AI experiences significantly contributed to this increase in usage.” AI’s boost to Google is noteworthy, since the search engine accounted for $54.2 billion of Alphabet’s $96.4 billion in second-quarter sales.
AI is also benefiting Alphabet’s other businesses, such as Google Cloud. That division saw second-quarter revenue rise an impressive 32% year over year to $13.6 billion as customers were drawn to Google Cloud’s AI.
Artificial intelligence also plays a crucial role in (literally) driving Alphabet’s autonomous car service, Waymo. With that technology behind the wheel, it delivers over a quarter-million passenger trips every week.
The company is slowly expanding Waymo to more cities. Atlanta is the latest location, initiated in June, adding to places such as Los Angeles and Austin, Texas.
Waymo also signed a multiyear deal with Avis in July, as the rental car company expands into ride-hailing services, providing Waymo with operational support, including vehicle maintenance.
Factors to consider with an Alphabet investment
The company is determined to be a leader in AI. That’s why it has made prodigious capital expenditures (capex) to boost its AI infrastructure. The second quarter’s $22.4 billion in capex represented the highest sum yet in any given quarter over the past four, and far above the $13.2 billion spent in the prior year’s second quarter.
Its huge spending left the company with $5.3 billion in second-quarter free cash flow (FCF). While that amount is down from the previous year’s $13.2 billion, a single quarter’s dip is not a concern. Alphabet has exceptional ability to generate FCF, producing a princely sum of $66.7 billion over the trailing 12 months.
The larger issue is that Alphabet was found guilty of antitrust violations in its digital advertising and Google Search businesses. This has been a factor in the tepid performance of its stock.
The courts have yet to announce the company’s punishment, but once it’s made public, the shares are likely to be affected to some degree, depending on the consequences to its business.
Management is appealing the rulings, and this could cause the antitrust cases to drag on for years, according to Pichai.
As a result, the threat to Alphabet’s business isn’t immediate. And ultimately, the legal challenges could be resolved with minimal impact, as was the result in a similar antitrust case against Microsoft in 1998, which concluded in a settlement.
To buy or not to buy Alphabet shares
In weighing whether to invest in Alphabet, one factor to consider is share price valuation. This can be assessed using its stock’s price-to-earnings (P/E) ratio, especially in comparison to competitors Microsoft and Meta. Both compete with Alphabet in digital advertising, while Microsoft is also a rival in cloud computing.
Data by YCharts.
The chart above shows that Alphabet’s P/E multiple is the lowest compared to Meta and Microsoft, suggesting its stock is the best value versus the competition. This is underscored by the fact the company’s earnings multiple is lower than it’s been over the past year, up until President Donald Trump’s announcement of tariff policy changes in April sank the entire stock market.
Although the antitrust cases present short-term uncertainty, the company’s deep pockets and commitment to battling the court rulings can help it navigate these challenges. With strong financials, successful AI initiatives, and an attractive valuation, now is a good time to consider buying shares in Alphabet.
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Robert Izquierdo has positions in Alphabet, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
