The Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOGL) share price jumped in early Thursday (30 October) trading after the tech giant’s third-quarter results the day before had smashed expectations.
Revenue surged 16% year-on-year to $102.3bn — the first time Alphabet has crossed the $100bn quarterly mark — while net income climbed 33% to nearly $35bn. Earnings per share rose 35% to $2.87, well ahead of analyst forecasts of $2.27.
This is quite an astonishing beat for a mega-cap stock. Just remember, there were something in the region of 40 analysts forecasting this quarter. And their collection earnings projection was just so far under the reported figure.
CEO Sundar Pichai credited Alphabet’s “full stack approach to AI”, highlighting the rapid rollout of AI Overviews and AI Mode in Search, as well as Gemini’s 7bn-token-per-minute processing capacity.
Google Cloud remained a standout performer, growing 33.5% to $15.2bn and ending the quarter with a $155bn backlog.
But the broader business just looks so robust too. The company boasts over 300m paid subscriptions and momentum across all segments. This confidence has allowed it to raise its capital expenditure guidance to $91bn–$93bn as the firm invests aggressively in artificial intelligence (AI) infrastructure.
Catalyst after catalyst
Back in April following Trump’s Liberation Day tariffs, Alphabet appeared vastly undervalued — at least to me and many of my Motley Fool colleagues.
Back then, Edward Sheldon (among others including Ben McPoland and Cliff D’Arcy) cited the company’s highly appealing value proposition and relatively low risk profile. Ed even called it a “value tech stock”, which was super accurate.
Also in April, I wrote that the price-to-earnings-to-growth (PEG) ratio of 1.1 represented a huge discount to the information technology sector average. Since then, the company’s experienced catalyst after catalyst.
Concerns over the US antitrust case and the rise of ChatGPT once weighed heavily on sentiment, particularly as investors questioned whether generative AI might erode Google’s Search dominance.
Q2 earnings however, helped steady confidence. It showed ad revenue and a sharp rebound in operating margins as AI tools began enhancing, not undermining, core products.
There have also been impressive announcements related to its quantum programmes, spiking investor interest.
The stock’s gone on to almost double since April. In fact, given some currency fluctuations, those UK investors who bought the stock then may have seen a 100% return.
What about now?
On the face value, the stock now trades at 27 times forward earnings and has a PEG ratio of 1.8. However, the recent outperformance is yet to be taken into account. I’d suggest it’s probably trading close to 24.5 times forward earnings and the PEG ratio will probably — if my calculations are correct — be closer to 1.5.
This is still a discount to the information technology sector average, and suggests the stock could push higher. There may also be a FOMO aspect to consider — Alphabet is a winner in AI, cloud technologies, search, autonomous driving, and even quantum computing.
However, some risks remain, including what AI may do to traditional search. An economic downturn, which isn’t off the cards, would also hurt ad spending.
Personally, I still believe Alphabet’s worth considering. It’s now my largest holding, just.
