Alphabet Crushes Expectations. Is It a No-Brainer Buy?

This has been an interesting year for Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). Investors have worried about the effect of artificial intelligence (AI) on its dominant search position, while the government won an antitrust lawsuit alleging that the company's search engine is an anticompetitive monopoly.

In other words, investors have been afraid of competition, while the government says there isn't enough competition, and Alphabet's stock has been squeezed in the middle between these two opposing forces.

However, the company got some good news when its shares popped following its strong third-quarter report. Let's take a closer look at its results to see if the recently beaten-down stock is now a no-brainer buy after another solid earnings report.

Google Cloud powers growth

Alphabet's third-quarter earnings were led by Google Cloud, its cloud computing unit, which saw its revenue soar 35% to $11.4 billion. It represents continued acceleration for the business, which grew revenue by 28% in the first quarter and 29% in the second.

The cloud segment's operating income surged to $1.95 billion from $1.2 billion in the second quarter and $266 million a year ago, as the company continues to leverage the high-fixed-cost nature of this business. Alphabet credited Google Cloud's strong performance to customers embracing generative AI solutions. The company said it has been able to differentiate its solutions by combining the use of its customized TPUs (tensor processing units) with GPUs (graphic processing units) to reduce inference processing times and lower costs.

Alphabet said customers are embracing its AI platform to build and customize models, and that its Gemini model is gaining a lot of traction. Management also singled out its data platform BigQuery, its AI-powered cybersecurity solutions Google Threat Intelligence and Security Operations, and its broadened app portfolio.

Google Search continued to post solid growth, with revenue up more than 12% to $49.4 billion. The company cited strength with financial services providers, especially insurance companies, as well as with retailers. It said that AI is helping the company to better understand its users, allowing it to better connect them with advertisers. Visual searches are performing well, the report said, with about 25% coming with a commercial intent to buy.

YouTube ad revenue rose 12% year over year to $8.9 billion. YouTube TV, NFL Sunday Ticket, and YouTube Music Premium are helping drive subscription growth, which surpassed $50 billion in revenue over the past year. Subscription platforms and devices revenue jumped 28% in the quarter to $10.7 billion.

Management said Alphabet's self-driving car unit, Waymo, is now delivering 150,000 paid public rides each week.

Overall, the company's revenue jumped 15% year over year to $88.27 billion, while adjusted earnings per share (EPS) rose 37% to $2.12. That was well ahead of the $86.3 billion in revenue and $1.85 in EPS that analysts were expecting, as compiled by the London Stock Exchange Group. The company reported $17.6 billion in free cash flow in the quarter and ended the period with $93.2 billion in cash and equivalents and $12.3 billion in debt. It bought back $15.3 billion in stock in the quarter.

Image source: Getty Images

Is it time to buy Alphabet?

While investors have worried about the impact of AI on Alphabet's business, thus far it has been nothing but a positive. Its cloud computing unit has been a huge beneficiary, with robust revenue growth and surging profitability.

Google Search continues to hum along, with the company using AI to help better match users and advertisers, while also beginning to incorporate ads into its AI Overviews as it experiments with new ways to monetize its search traffic.

YouTube continues to grow solidly, while its subscription businesses are showing strong growth. Waymo has taken the lead in the robotaxi space and could turn into a big winner if it can drive costs down while maintaining safety.

Alphabet currently trades at a forward price-to-earnings ratio (P/E) of about 20.5, making it one of the cheapest megacap tech stocks even with its strong growth and booming cloud computing business.

GOOGL PE ratio (forward 1y); data by YCharts.

While the antitrust verdict against the company will likely remain an overhang until a remedy is determined, this is a company that is proving to be an AI winner that could very well be worth more broken up than combined. As pure plays, businesses like Google Cloud, YouTube, and Waymo would likely command some pretty hefty multiples.

As such, I think Alphabet is a no-brainer buy for long-term investors at current levels.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.