Shares of Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) experienced a downturn following the announcement of its fourth-quarter results. Despite reporting a decline in sales, the company claimed it was observing an acceleration in revenue growth. Nonetheless, the stock remains up over 50% from a year ago.
Looking more closely at the company’s Q4 performance and what this means for its future, there are some interesting developments.
Google Cloud, Alphabet’s cloud division, continues to shine as a leader in artificial intelligence (AI). Revenue growth surged to 48% during the quarter, up from 34% in Q3 and 32% in Q2, totaling $17.7 billion. Operating profit also saw a significant increase, rising to $5.3 billion from $2.1 billion the previous year. Additionally, the backlog increased by 55% to $240 billion.
The company surprised many by setting a capital expenditure (Capex) budget of between $175 billion and $185 billion for 2026, a sharp increase from the $91 billion allocated in 2025. It’s noteworthy that Apple has positioned itself as the cloud computing partner for future AI model development for iPhone makers.
Revenue from Google Search grew by 17% to $63.1 billion, maintaining an upward trend from 15% in Q3, 12% in Q2, and 10% in Q1. The company reported record search queries in Q4, suggesting that AI is not just influencing how searches are conducted, but actually enhancing traditional search without replacing it.
YouTube also had a solid quarter, with ad revenue rising 9% to $11.4 billion. The combined revenue from YouTube and services like Google One and Music saw a 17% rise to $13.6 billion. Meanwhile, Alphabet’s Waymo Robotaxi division is expanding, recently launching in Miami and securing $16 billion for its subsidiary, bringing its valuation to $126 billion.
Overall, Alphabet reported an 18% increase in total quarterly revenue, reaching $113.8 billion, with earnings per share rising by 31% year-over-year to $2.82. This performance exceeded expectations, as analysts had predicted an EPS of $2.63 on revenue of $111.4 billion.
Alphabet’s results indicate a strong commitment to leading in the AI sector. By investing in custom AI chips, known as Tensor Processing Units (TPUs), the company aims to maintain a competitive edge. The return on investments across various sectors, including Google Cloud and search, shows promise. Notably, AI seems to be a catalyst for growth rather than a threat to its search business.
The stock currently trades at a forward price-to-earnings ratio of around 29 and a price-to-earnings growth (PEG) ratio of approximately 0.7, hinting at potential undervaluation, especially given its position among top AI contenders.
In summary, I see this stock as a buy and believe it may excel as a major player by 2026.
However, it’s worth considering that not all investment analysts recommend Alphabet as a top choice right now.
