After Earnings, Is Alphabet Stock a Buy, a Sell, or Fairly Valued?

Alphabet released its second-quarter earnings report on July 22. Here’s Morningstar’s take on Alphabet’s earnings and stock.

Key Morningstar Metrics for Alphabet

• Fair Value Estimate
  : USD 433.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Alphabet’s Q2 Earnings

Alphabet reported strong second-quarter earnings, with the firm’s sales growing 24% to USD 120 billion and its operating margins expanding 2 points to 34%. Google Cloud grew by 82% to USD 25 billion, with margins for the cloud segment also increasing by 15 points to 36% (all returns in this article based on a US dollar basis).

Why it matters: Alphabet continues to show real progress in artificial intelligence monetization. As investors seek to understand the returns on massive AI-driven data center spending, we believe returns are showing up for Alphabet across its primary segments.

• The clearest signal of booming AI spending is found in the Google Cloud segment, with the backlog, or contracted future revenue, increasing to USD 514 billion, up from USD 108 billion a year ago.
• Beyond cloud, we are seeing continued strength in Search, with Google Search growing 17%. Encouragingly, Alphabet’s push to an AI-native search experience is seeing good adoption, with AI Mode’s monthly users exceeding one billion.

Key stats: Alphabet’s free cash flow turned negative this quarter, a trend we expect to continue in the coming quarters as the firm ramps up its AI investments. As mentioned above, we believe investors should focus on the AI demand story, which supports such large capital expenditures

The bottom line: We maintain our USD 433 fair value estimate for wide-moat Alphabet, and continue to view its AI monetization across chips, infrastructure, models, and applications as a great way for investors to gain AI exposure without being limited to a specific part of the AI stack.

• Alphabet traded down immediately after earnings, likely due to investor concern about the firm’s rising capital expenditures, which are expected to exceed USD 200 billion in 2026.
• We’d position investor attention on the real returns the firm is generating from its large AI investments, including significant growth in its cloud business and core advertising business. We model continued acceleration as the firm’s hardware sales inflect upward in 2027.
• Long-term investors that can bear near-term volatility should take a close look at Alphabet stock. We view the company’s AI investments as value-accretive, and believe the company is setting itself up in a way that will allow it to benefit from both the AI buildout and its proliferation.

The following are excerpts from Morningstar’s company report on Alphabet stock.

Fair Value Estimate for Alphabet Stock

With its 4-star rating, we believe Alphabet stock is moderately undervalued compared with our long-term fair value estimate of USD 433 per share, implying a 2026 adjusted price/earnings multiple of 30 times and an enterprise value/adjusted EBITDA multiple of 26 times. We forecast Alphabet’s top line growing at an 18% compound annual growth rate over the next five years.

Read more about Alphabet’s fair value estimate.

Economic Moat Rating

We believe Alphabet merits a wide economic moat, owing to the intangible assets, network effect, cost advantage, and customer switching costs that permeate its businesses. We assign wide economic moats to Google Search, YouTube, Google Cloud, Android and Google Play, devices, and other bets (which includes Google’s aspirational projects such as self-driving vehicles and internet access).

We believe that Alphabet’s hardware portfolio, which includes the Pixel and Nest group of products, does not merit a moat as a standalone business. This is primarily due to the lack of any material disclosure that would allow us to ascertain the business’ profitability and returns generated. While Alphabet’s other bets portfolio includes some interesting companies, including autonomous vehicle company Waymo, the segment continues to burn capital, generating returns well below its cost of capital. As a result, we ascribe a no-moat rating to Alphabet’s other bets business.

Read more about Alphabet’s economic moat.

Financial Strength

We view Alphabet’s financial position as virtually unassailable. The firm closed 2025 with cash and cash equivalents of USD 127 billion, more than offsetting its debt balance of USD 46 billion. The firm’s advertising business is a cash-generating machine, churning out tens of billions of dollars in free cash flow annually. Alongside advertising, Alphabet is making progress on diversifying its cash generation, with Google Cloud and YouTube subscription sales as additional free cash flow drivers.

Read more about Alphabet’s financial strength.

Risk and Uncertainty

We assign Alphabet an Uncertainty Rating of Medium. This reflects our belief that despite near-term uncertainty around antitrust regulation and potential competition in the AI-infused search market, Alphabet is well-positioned to expand its overall business while maintaining a rock-solid balance sheet. We believe Google’s intangible assets and network effects will likely safeguard its dominance in the search space.

We do think Google Search’s status as the runaway leader in search could come under pressure, primarily due to the antitrust scrutiny. While we don’t see the firm’s market leadership slipping due to antitrust concerns, this issue adds uncertainty to an otherwise stable business. Another key area of uncertainty for Alphabet as a whole is its considerable amount of investment in new AI technologies such as generative AI. While we view these investments as value-accretive, especially considering the myriad ways Alphabet can monetize its technological know-how in AI, we view them as adding more uncertainty to the range of possible outcomes for Alphabet’s top line and profitability in the future.

The firm’s high dependence on user behavior data represents an environmental, social, and governance risk. If it fails to maintain adequate data privacy and security, Google’s advertising business would likely suffer, and users’ trust in the firm’s other products would likely falter.

Read more about Alphabet’s risk and uncertainty.

GOOGL Bulls Say

• Alphabet’s core advertising business is deeply entrenched in advertising budgets, allowing the firm to benefit from a secular increase in digital advertising spending
• The firm’s advertising business generates substantial cash flows that it can reinvest in growth areas such as GCP, AI-infused search, and aspirational projects like Waymo.
• Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.

GOOGL Bears Say

• While Alphabet is seeking to diversify its business away from search, text-based advertising remains the largest contributor to the firm’s top line, creating a concentration risk.
• Alphabet’s continued investments in new, often unproven technologies have been a drag on cash flows.
• Regulators around the world are keying in on Alphabet’s search dominance and could upend the search market through the imposition of big, structural changes in the space.

This article was compiled by Irza Waraich.