Why I'm Still Buying Alphabet Stock Despite Q4 Cloud Setbacks

Many investors are missing some positive indicators about Alphabet's future.

It's clear that Alphabet's (GOOG) (GOOGL) cloud computing segment fell short in the fourth quarter. Investor sentiment has been dampened by concerns about the company's significant investment in artificial intelligence (AI).

As a result, the company's stock took a hit following the release of its fourth-quarter earnings.

However, don’t let the negative reactions alarm you too much. Several key details that support a positive outlook for Alphabet were overshadowed by the noise after the earnings announcement.

The Numbers Speak

During the last three months of the year, Alphabet reported a revenue of $96.5 billion and a per-share profit of $2.15. Both figures showed an increase from the previous year and were fairly close to what analysts had predicted.

All eyes were on the cloud division, which disappointed many. The cloud revenue reached nearly $12 billion, a 30% year-over-year growth, providing an operating income of just under $2.1 billion. Yet, analysts had expected a figure of about $12.2 billion, leading to concerns about a slowdown in Alphabet's cloud growth.

However, if we look at the broader picture, Alphabet's cloud division has maintained consistent growth since early 2020. The slower growth in the fourth quarter compared to a 36% increase in the third quarter could be seen as an outlier, not a trend.

Moreover, gain statistics show that while earnings barely edged out expectations of $2.13 per share and revenue was slightly below the $96.56 billion forecast, most of Alphabet’s divisions reported strong growth in sales and profits. The disappointment mainly stemmed from the “other bets” segment, which suffered a notable revenue decline from $657 million to $400 million year-over-year and saw losses increase from $863 million to nearly $1.2 billion. Without this downturn, Alphabet would have surpassed overall expectations.

The “other bets” segment includes experimental projects like the robot taxi service Waymo and the life sciences company Verily. These initiatives are often high in risk and cost, making their outcomes hard to predict.

Nevertheless, even with challenges in the cloud business and the performance of other bets, Alphabet continues to generate record revenue and profits, maintaining profit margins around 32.1% of revenue.

Looking Ahead

So, why the sell-off on the following day?

The cautious news surrounding Alphabet's cloud business understandably unsettled investors. However, it's essential to note that the stock was already in a precarious position before the earnings report. Alphabet is facing pressure from the Justice Department to sell its Chrome browser, which is crucial for connecting users to its search engine. Additionally, the company is involved in a significant legal battle with the European Union regarding a hefty antitrust fine related to its Android operating system.

Given this context, it's no surprise that the stock suffered a setback after hitting record highs just before the earnings announcement. Investors seem concerned about the company's plan to allocate an additional $75 billion towards AI data centers this year, marking a 29% increase over previous expectations.

However, it's wise to refrain from making broad judgments. The situation was already complex before the latest report, and the media often highlighted negative aspects without sufficient context. Crucially, Alphabet's primary businesses are still performing well, and its future ventures in AI offer considerable promise.

Moreover, even if the recent stock sell-off continues, this dip may present a buying opportunity for long-term investors. Alphabet is likely to remain a pivotal player in the digital world, with its Google search engine accounting for about 90% of global web searches, according to GlobalStats.

Financial analysts from Goldman Sachs project that the global cloud computing sector will grow at an annual rate of over 20% until 2030. Meanwhile, market researchers at Technavio anticipate that the AI platform market will expand at an impressive pace of 45% each year through 2028.

This leaves a wealth of opportunities for Alphabet to explore. The results from last quarter do not fully reflect the company's potential. For interested investors, this current dip represents a valuable chance to buy in.

Disclaimer: The author holds shares in Alphabet.

Alphabet, Investors, Cloud