Buy Alphabet Stock on This Dip. Here’s Why.

There’s no disputing that Alphabet (GOOG -0.28%) (GOOGL -0.17%) is spending an uncomfortable amount of money. That’s why its stock fell following the release of last quarter’s results, in fact, despite topping revenue and profit estimates for the three-month stretch — there’s just a lot of cash coming right back out of its growing business.

Maybe the market’s lost some perspective here. Alphabet stock’s recent pullback is arguably less of a warning and more of an opportunity to anyone willing to take a step back and see the bigger picture.

Alphabet stock’s tumble makes sense — on the surface

It would be great if Google’s parent was spending less and growing more. On balance though, Alphabet CEO Sundar Pichai’s got the right idea, and is balancing spending with potential. Moreover, his company is still showing strong, investment-worthy performance in the face of headwinds and stiff competition.

But first things first.

For its second quarter ending in June, Alphabet turned $84.7 billion worth of revenue into a per-share profit of $1.89. Both figures are up from year-earlier comparisons of $74.6 billion and $1.44 per share. And, perhaps more important, both numbers beat expectations for earnings of $1.84 per share on sales of $84.2 billion.

Google’s cloud computing business showed particularly strong revenue and operating income growth, although the company’s breadwinning advertising business also made good progress compared to a modest increase in traffic-acquisition costs.

There were stumbling blocks, though. One of them is YouTube’s slowdown. Although last quarter’s revenue of nearly $8.7 billion was up 13% year over year, that’s less than analysts were anticipating for the ad-driven video platform. It’s also slower than Q1’s sales growth of 20%.

Perhaps investors’ top concern with Alphabet’s second-quarter results, however, is the amount of money the company’s still spending on major projects. CFO Ruth Porat explained during Q2’s earnings call that $13.2 billion worth of capital expenditures — mostly investments in its artificial intelligence (AI) offerings — were made during the quarter versus expectations of only around $12 billion. That’s roughly how much Alphabet intends to spend in each of the next few quarters, too, extending losses linked to the development of its AI offerings.

Investors latching on to these two details, however, are overlooking a handful of other bullish nuances buried in the company’s second-quarter numbers.

The glass is actually half-full, and then some

One of these nuances has already been highlighted. That’s traffic acquisition costs that aren’t rising nearly as rapidly as revenue. This expense was only up 6% year over year in Q2.

Another detail from the company’s second-quarter results being glossed over is just how much profit Google’s cloud computing arm is producing. Although it remained in the red until the first quarter of last year, now that it’s in the black a little bit of top-line growth is producing an exaggerated degree of bottom-line benefit. Of Google Cloud’s second-quarter revenue of more than $10.3 billion, nearly $1.2 billion was turned into operating income.

Given the trajectory of this arm’s sales and profits, look for cloud to become an even bigger earnings contributor in the foreseeable future.

It’s also worth adding that while Alphabet is shelling out more on AI-related capital expenses than most investors like, it’s curbing other costs without crimping its ability to conduct business. Sales and marketing costs last quarter were in line with year-ago figures even though advertising revenue grew, for instance, while general and administrative spending actually fell 9% from nearly $3.5 billion to less than $3.2 billion this time around. Most of that decrease reflects a reduction in Alphabet’s employee headcount.

More than anything though, investors may want to accept that there’s a major payoff in the cards for all the spending on artificial intelligence Alphabet is doing now. As Pichai explained during the company’s second-quarter earnings conference call, “The risk of under-investing is dramatically greater than the risk of over-investing for us here.” These investments will not only allow Alphabet to continue building its free, consumer-facing Gemini I platform, but also to continue the development of revenue-bearing AI chatbots and enterprise-specific assistants well into the future.

It matters simply because this is where artificial intelligence’s commercial future lies. Precedence Research predicts the worldwide enterprise AI market will swell from roughly $14.5 billion this year to more than $270 billion by 2032, with prospective customers recognizing its value at the same time developers like Google continue refining their offerings. That’s an annualized growth rate of 44%, jibing with Mordor Intelligence’s expectation that enterprise AI will drive average annual sales growth of 52% for a similar time frame.

Don’t miss what everyone else is looking past

So why are most investors only looking at Alphabet’s second quarter through a bearish lens, and extending a sell-off that was underway well before Tuesday evening’s release of its second-quarter numbers? Because the market is fickle, for one, eager to change its mind at the drop of a hat. The broad bearishness that’s been brewing for several days may also have something to do with investors’ pessimistic moods.

Short-term noise doesn’t change long-term reality, though. And the reality here is simply that Alphabet is still a powerhouse, and is still positioned to thrive on its deep leadership of the web-search advertising market. Improvements on the AI front will only cement its leading role on this stage.

In the meantime cloud computing is rapidly becoming a significant growth engine with an operating margin that could continue to soar before finally catching up with those of Amazon and Microsoft. Only about one-tenth of Google Cloud’s second-quarter cloud sales was converted into operating income, for perspective, versus 37% for Amazon Web Services and a similar figure for Microsoft’s Intelligent Cloud arm (including Azure). This prospect doesn’t appear to be factored into Alphabet stock’s present price at all.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.