Alphabet Shares Plunge. Why Now Is a Great Time to Buy the Dip.

Alphabet (GOOGL -12.64%) (GOOG -12.29%) shares were slammed following the company’s third-quarter earnings report, as its search revenue growth slowed and it missed expectations. However, this problem looks fixable, and the company’s cloud computing business delivered exceptional results.

Let’s take a closer look at the search giant’s Q3 results and why I think the stock is a buy on this dip.

GOOGL – Alphabet

$283.82-$41.07 (-12.64%)

NASDAQ · As of 4:00 PM ET 10/29/26

Search revenue misses

The biggest reason Alphabet shares sank was that its search revenue growth decelerated from 17% from the second quarter and missed expectations. For Q3, search revenue grew 12% to $63.35 billion, below analyst estimates of $64.96 billion. The slower growth stemmed from a combination of currency fluctuations, the timing of the World Cup, the end of the European Union de minimis exception (no duties on low-cost items), and lower monetization of AI queries compared with traditional search.

While the company said currency was the biggest drag, the last one is what caught everyone’s attention. Alphabet said it saw its highest query growth in five years, but revenue growth still slowed. This means it was seeing lower revenue per search with its newer AI queries. The worry is that this could become a structural issue. However, this looks fixable as it works to find the right ad formats. The company will start offering ads in AI international markets for the first time, while also introducing new multi-turn ads (ads that adapt to evolving content during AI queries) in the U.S.

Management also spoke positively about Alphabet’s stand-alone Gemini app, which recently reached 1 billion users. It said it was the fastest-growing product in its history. The company also launched its new Carbon model the same day as its earnings report, shortly after introducing its Argon model.

While Alphabet’s search segment was a disappointment, its cloud computing unit was a huge bright spot. Google Cloud revenue more than doubled to $30.7 billion, and topped the $28.7 billion cloud revenue consensus. The company’s cloud growth is far outpacing that of rivals Microsoft and Amazon as it takes market share. Impressively, cloud operating income more than tripled to $11.1 billion, as its operating margins climbed from 23.7% a year ago to 36.2%. Cloud computing is a high-fixed-cost business, and Alphabet is seeing significant operating leverage. As such, expect its cloud computing operating income to continue to outpace revenue growth.

Alphabet ended the quarter with a backlog of $561 billion. It expects about 55% of that to convert to revenue over the next two years. This also includes sales of tensor processing units (TPUs).

Looking at Alphabet’s other segments, YouTube ad revenue climbed 9% to $11.2 billion, while Google Network revenue edged up 1% to $7.5 billion. Subscription (YouTube Premium and Music) revenue, meanwhile, rose 11% to $14.3 billion.

Overall, Alphabet’s Q3 revenue jumped 25% to $127.6 billion, while its earnings per share fell 26% to $2.12. Much of this was due to a paper loss on its SpaceX investment, and adjusted EPS was around $2.67. However, the results still missed analyst expectations for EPS of $3.02 on revenue of $128.2 billion

Also notable during the quarter was Alphabet’s negative free cash flow of $9.1 billion as it ramped up its AI infrastructure spending. That was also below the negative $2.7 billion analysts expected, but it did include a $5.2 billion fine. Operating cash flow, meanwhile, was a robust $42.3 billion for the quarter.

Image source: The Motley Fool

Why the stock is a buy

Following the stock’s dip, Alphabet trades at a forward P/E of just above 18.5 times 2027 analyst estimates. That ultimately should prove to be a bargain for a company with the most complete tech stack.

Google Cloud has become a monster, with rapid revenue growth and great operating leverage, and its TPUs give the company a distinct advantage and additional underappreciated growth driver. Meanwhile, Alphabet is seeing strong query growth, but it needs to find a way to better monetize AI Mode searches, which should be fixable.

In typical Wall Street fashion, investors are shooting first and asking questions later, creating a great opportunity to buy this top AI stock on this dip.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.