Morningstar

Alphabet Earnings: Continued Momentum on Cloud and Search as Capital Expenses Set to Mount

We think Alphabet stock is fairly valued.

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Jeremy Moeller via Getty
Securities in This Article
Alphabet Inc Class C
(GOOG)

Key Morningstar Metrics for Alphabet

What We Thought of Alphabet’s Earnings

Alphabet GOOG reported strong fourth-quarter earnings, with sales up 18% to $113 billion and adjusted operating margins down 50 basis points to 31.6%. Google Cloud continues to be the star of the show, accelerating both sequentially and year over year to 48% growth.

Why it matters: Long gone are the days when the market had written off Alphabet as an artificial intelligence laggard. The massive surge in Alphabet shares has closely mirrored a turning tide, with investors now viewing the firm as an AI winner, with AI driving sales across the firm’s many segments.

  • The most obvious beneficiary of AI within Alphabet remains its cloud business, which now constitutes 16% of the firm’s total top line. The launch of Gemini 3, Alphabet’s latest large language model, continued to expand the firm’s enterprise and consumer market share.
  • We are impressed at how Alphabet continues to integrate AI within Google Search. By adding features such as AI Overviews and AI Mode, the firm has not only mitigated a real competitive threat from GenAI chatbots but also increased the number of queries and the ad price per query.

The bottom line: We maintain our $340 fair value estimate for wide-moat Alphabet and continue to view the firm as a clear leader in AI. Shares traded slightly down after hours, and we view them as fairly valued.

  • We continue to applaud Alphabet’s full-stack AI strategy, which enables the firm to be the master of its own destiny. Unlike peers that rely on external AI labs and AI chips, Alphabet’s investments in Google DeepMind and TPUs appear increasingly prescient over time.

Big picture: While results remain upbeat, it is important to step back and remain cognizant of the costs associated with AI. Management guided to approximately $180 billion in capital expenditures in 2026, a 97% year-over-year increase, and 38% of our sales forecast for the year.

Coming up: We expect a broader rollout of ads within AI Search in 2026, which should add incremental Google Search sales.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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