I’d Still Buy Alphabet Stock Despite the Stumble Over Q4 Cloud Growth. Here’s Why. todayheadline

There’s no denying it: Alphabet‘s (GOOG -3.19%) (GOOGL -3.27%) cloud computing business simply came up short of expectations in the fourth quarter. Investors aren’t exactly thrilled with the company’s intended expenditures on artificial intelligence (AI), either.

Shareholders paid the price, in the form of a sizable sell-off following Tuesday’s release of the company’s fourth-quarter numbers.

Don’t be too rattled by the bearish response, though. A couple of important details that support the overall bullish case for the stock were obscured by all the post-earnings noise.

By the numbers

For the three months ending in December, Alphabet turned $96.5 billion in revenue into a per-share profit of $2.15. Both were up from year-ago levels and more or less in line with expectations.

All eyes were on the company’s cloud business, though, which failed to satisfy. Although cloud revenue of nearly $12 billion soared 30% year over year to generate operating income of just under $2.1 billion, analysts were looking for a top-line figure of just under $12.2 billion. The small shortfall underscored the fact that Alphabet’s cloud computing growth is slowing.

Except that as the chart below shows, going all the way back to early 2020, Google Cloud’s top and bottom lines are maintaining the same forward progress based on the bigger picture. From a technical and mathematical perspective, the fourth quarter’s cloud revenue growth is slower than the third quarter’s 36% increase, but the third quarter’s accelerated growth was something of an outlier. 

Companywide, earnings barely beat expectations of $2.13 per share, while revenue was a few million bucks shy of the $96.56 billion analysts were modeling. Neither reflects Alphabet’s typical strong estimate-beating form.

Again, though, a closer look at the numbers will show that except for the Google Network, all of Alphabet’s core profit centers experienced robust growth in sales and operating income. It was the “other bets” division that accounted for most of the overall disappointment. Its revenue slipped from $657 million in the final quarter of 2023 to $400 million 12 months later, while its loss worsened from $863 million to nearly $1.2 million. Were it not for that stumble, Alphabet would have handily topped its overall estimates.

The other bets segment is where you’ll find its most experimental and costliest projects, like the robotaxi Waymo, the life sciences brand Verily, and its robotics software Intrinsic. These efforts carry high risks, high costs, and high payoffs, but they don’t lend themselves to consistent or predictable results.

Even so, despite the company’s cloud computing business’ reported headwind and other bets’ rough quarter, Alphabet has never generated more revenue or produced more profit than right now. Its profit margins are also still about as strong as they’ve ever been, at 32.1% of revenue.

Data source: Alphabet. Chart by author.

Opportunity knocks

So why was there a sell-off on Wednesday?

The dour headlines about Alphabet’s cloud business understandably rattled the market, particularly given that most of the reporting failed to offer the context that the two charts above provide.

That being said, it’s also not a stretch to suggest the stock was vulnerable to a post-earnings sell-off no matter what management said Tuesday evening.

The Justice Department is pressuring Alphabet to sell its Chrome browser, undermining one of the key ways it connects consumers to its search engine. And it’s fighting a brutal legal battle with the European Union to undo a multibillion-dollar antitrust fine levied against its Android operating system installed on most of the world’s mobile devices.

Given this backdrop, it’s surprising this stock was able to climb to a record high headed into Tuesday evening’s release of its fourth-quarter results. Conversely, it’s not surprising this fragile rally ended up being so vulnerable to even modestly concerning numbers.

Investors don’t exactly seem thrilled that the company plans to spend another $75 billion on AI data centers this year (29% more than expected) rather than seeing this spending at least begin to level off.

Ragardless, don’t be too quick to come to any sweeping conclusions. This ticker was already in an unusual position headed into Tuesday’s report. Then there were the couple of curveballs from the financial media that lacked the proper context: the fact that Alphabet’s most important businesses are still growing quite well, while its newer ventures like AI remain promising.

More to the point, even if the recent selling has yet to run its full course, Wednesday’s setback is a long-term buying opportunity.

Even without Chrome, Alphabet is likely to remain the centerpiece of most peoples’ digital connection to the world. Its Google search engine still handles about 90% of the world’s web searches, according to GlobalStats.

And Goldman Sachs believes the worldwide cloud computing industry is poised to grow at an average annual pace of more than 20% through 2030, while market researcher Technavio predicts the global AI platform market will expand at an annualized pace of 45% through 2028.

So there’s plenty of opportunity ahead for Alphabet to tap into. Last quarter (and in particular the commentary regarding last quarter) isn’t an accurate representation of this company’s potential. This dip is a buying opportunity for interested investors.