Weak tech earnings are sending investors for the hills, so it may not be the best time for optimism. It also isn't a time to overreact.
Shares of Google-parent Alphabet have been hammered. Yes, there are risks -- as there are with any company spending big on the artificial intelligence buildout. But Barron's is sticking with its call.
The company is still an AI winner. And now shares look shockingly cheap, trading at half the multiple that AI-wary Apple fetches.
We first picked Alphabet in November 2024, when shares traded at about $168, arguing then that fears of a breakup and the death of Google search at the hands of OpenAI's ChatGPT were overblown. That advice worked out well for readers who listened. With Alphabet stock at about $320 in November 2025, we reiterated our position.
That call looked solid until AI fears reemerged over the summer. The iShares Semiconductor exchange-traded fund peaked in June after Broadcom's disappointing earnings report that included weaker-than-expected guidance for its semiconductor business. (Guidance was for 200% year-over-year growth.)
That was also about the time that Alphabet announced an $80 billion stock sale, and days before SpaceX raised $75 billion in its record-setting IPO. Questions swirled: Were tech players spending too aggressively on AI? Will they make money? How are they financing the buildout?
Fear reached a tipping point earlier this week when Alphabet reported weaker-than-expected third-quarter earnings. Operating profit of almost $41 billion only grew 30% from a year ago. The problem? Wall Street was looking for $43 billion.
Shares fell almost 13% to $282.32 after earnings, pushing shares down more than 30% from the high of $404.47 reached in May. A $2 billion profit miss drove a $560 billion one-day decline in market value.
Barron's isn't here to argue with the market. But it is important to remain clear-eyed when volatility picks up. The earnings miss had little to do with AI.
Alphabet's cloud business more than doubled in the quarter, up from closer to 80% growth in the second quarter. Other cloud businesses are also seeing strong growth. Amazon.com's AWS business grew by 39% in the same quarter, faster than in the second quarter. Microsoft's Azure cloud business grew by 48% in the quarter -- again -- faster than in the second quarter.
And those performances came after other positive AI developments this week. AI growth at SpaceX was better than expected, and Anthropic's IPO registration statement showed relatively impressive profitability.
Alphabet's problem was that ad spending on Google search grew by 12%, down from 17% last quarter; ad spending on YouTube grew by 9%, down from 13%.
That raises two risks.
For one, it suggests that the economy isn't as strong as it once was. Results from other tech firms bear that out. Amazon.com's retail business was relatively weak in the third quarter, and Intel plunged partly because of an unexpected downturn in personal computers. Soaring memory chip prices have made them more expensive.
The economy is a risk that all investors need to continuously monitor. But it isn't the main factor that will determine Alphabet's stock direction over the coming months.
That comes down to the second risk: cannibalization. In other words, is Google's AI business eating search?
And that is where there is no shortage of opinion on Wall Street. Melius analyst Ben Reitzes called Alphabet's earnings evidence of secular decline. Most analysts skew positive, however. "AI mode [search] monetization is just beginning," Citi analyst Ronald Josey said. KeyBanc Capital Markets analyst Justin Patterson called the quarter an "air pocket," adding search monetization headwinds are "transitory." Deutsche Bank analyst Benjamin Black said AI is driving the strongest search-query growth in five years. He expects Alphabet to earn money from the search growth -- eventually -- likening it to when Meta Platforms first rolled out Reels, which initially took user engagement away from Facebook and Instagram's core feed.
Analyst commentary is worth considering. Valuation is a better reason to buy.
Alphabet trades for 18 times estimated earnings over the next 12 months, a discount to the S&P 500's 19 times multiple. Alphabet is the second cheapest stock of the Magnificent Seven. Nvidia shares trade at about 15 times.
Furthermore, Alphabet and Apple often trade at the same multiple, with a 25% discount being relatively normal over the past few years. Alphabet stock is now trading for less than 50% of Apple's 36-times multiple, the biggest discount between those two stocks over the past five years. If that 25% discount returned, Alphabet stock would trade at $400, up almost 50% from recent levels.
And what about Alphabet's free cash flow, which has been negative for two straight quarters? Well, Alphabet isn't a startup looking for profitability. It is spending on AI to build a new trillion-dollar business. If it shut off spending, free cash flow would return -- but would investors really prefer that? Probably not.
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