Alphabet (GOOGL -3.27%) (GOOG -3.19%) share prices tumbled as much as 8.4% following its Q4 earnings report as the market came away disappointed with the tech giant’s cloud computing revenue growth rate. Like a number of other large tech companies, Alphabet is also set to ramp up its artificial intelligence (AI) infrastructure spending this year. News of Alphabet’s AI-related plans was also a drag on the share price.
Let’s take a closer look at the internet search leader’s Q4 results to see if this is a good time to buy the stock on the dip.
Google Cloud in focus
Alphabet’s Google Cloud business was in focus in Q4, with the cloud computing unit growing its revenue by 30% to $12 billion. That was a deceleration in revenue growth from 35% in Q3, and the total fell short of the $12.2 billion analyst consensus estimate, as compiled by Street Account. Operating income for the unit, meanwhile, soared from $864 million to $2.09 billion, a 142% increase.
The company credited the growth to its AI infrastructure and generative AI solutions while noting that its Google Cloud Platform (GCP) grew faster than the overall cloud business. However, the business was capacity-constrained. As a result, it will direct approximately $75 billion to capital expenditures (capex) focused largely on technical infrastructure, including data centers and servers, to help meet increased AI demand. That’s a big jump from the $52.5 billion in capex the company spent last year. However, the company said it is seeing a lot of capex efficiency and strong performance stemming from its own custom TPU (tensor processing unit) chips.
Meanwhile, the company expects the launch of its new Gemini 2.0 AI model to help drive growth as it moves closer to being a universal assistant. The model has more advanced multimodal and agentic capabilities and will also be used to power its AI Overviews within search. It said its consumer Gemini app is also gaining traction.
Turning to Alphabet’s other businesses, Google Search remained strong, with revenue climbing nearly 13% to $54 billion. It said it is seeing new ways in which people search, with its Lens solution being used for more than 20 billion visual search queries each month. It said that this is expanding the way its advertisers can reach consumers. Overall, the company was seeing the most strength among financial services provider and retailer advertisers.
YouTube ad revenue, meanwhile, climbed 14% year over year to $10.5 billion. The platform’s growth was fueled by users spending more time watching videos on its platform. It also said that Google AI-powered video campaigns are driving better returns for advertisers.
One area of weakness was Google’s Network ad business, which saw revenue decline by 4% to $8 billion. Subscription and device revenue, meanwhile, rose 7% to $11.6 billion.
Looking at Alphabet’s emerging businesses, its self-driving car unit Waymo is currently delivering 150,000 paid public rides each week. It will expand its service to the new markets of Austin and Atlanta this year, as well as its first international city in Tokyo, Japan. It also said it is working on the sixth generation of its self-driving vehicle that will significantly reduce hardware costs. Alphabet also touted the progress it has made in quantum computing with its new Willow chip.
Overall, Alphabet’s total revenue climbed 12% year over year to $96.47 billion, while adjusted earnings per share (EPS) jumped 31% to $2.15. Analysts were expecting revenue of $96.56 billion and $2.13 in EPS, as compiled by LSEG. Alphabet reported $24.8 billion in free cash flow in the quarter and $72.8 billion for the year. It ended the year with $95.7 billion in cash and equivalents and $10.9 billion in debt.
Image source: Getty Images
Is it time to buy the dip?
Similar to rival Microsoft, investors did not like the deceleration in growth at its cloud computing unit. They also seemed a bit surprised at how much the company plans to spend on AI infrastructure capex this year. However, neither should really come as a surprise. Cloud computing growth continues to be hampered by capacity constraints industrywide, and companies will need to spend in order to add capacity.
If DeepSeek, which shook up the AI world with its claims that its model was trained for under $6 milllion can eventually prove that not as much AI infrastructure spending is needed, that would be a positive for cloud computing companies like Alphabet. However, the reliability of DeepSeek’s claims is in question and until proven otherwise, cloud computing companies will need to keep spending to drive growth. Google Cloud should be in a pretty good position to leverage its spending, given that its custom TPUs should help on the cost front.
Despite the market’s reaction, I think Alphabet’s quarter overall was solid, with both Google Search and YouTube showing their market-leading strength. Meanwhile, Google Cloud continues to drive both revenue and profitability growth.
Looking at valuation, Alphabet currently trades at a forward price-to-earnings ratio (P/E) of about 20.8x 2025 analyst estimates, making it one of the cheapest megacap tech stocks tied to AI.
Overall, I think the dip in the stock is a short-term overreaction to what is a very good long-term story for Alphabet. As such, I’d be a buyer of the stock on the dip.
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