Shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Google’s parent company, were trading down over 10% on Oct. 29, the day after its third-quarter report. It appears decelerating growth in search revenue and heavy spending on artificial intelligence (AI) are the two main factors to blame. Capital spending on data centers and equipment topped $51 billion in the quarter, pushing free cash flow to negative $9 billion.
But that spending is funding the one reason to buy the dip: Alphabet is becoming more than a search company. Revenue from Google Search now brings in less than half of total revenue, down from 55% a year ago. Revenue outside of Search grew 40% year over year to $64 billion.
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Google Cloud is the star of the show, with revenue more than doubling, and its operating margin climbed to 36% from 24% a year ago. Its backlog reached $561 billion, which puts the cloud business on course to potentially exceed Search revenue over time if it maintains high growth.
The growing profits in the cloud segment show that AI spending is generating returns on investment. Management expects capital spending to increase “significantly” in 2027. This should enable more cloud growth by unlocking more of its backlog, as data center capacity translates into revenue almost as soon as additional compute is brought online.
At just under 19 times 2027 earnings estimates, Google stock now trades in line with the S&P 500‘s average forward earnings multiple. This looks like a good opportunity to invest in one of the most dominant companies at an average valuation.
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