Alphabet (NASDAQ:GOOG) owns the place where most people start a search, and it is adding AI to that product without losing users. Search revenue still grew 17% in the second quarter, after 19% in the first, while Google rolled out AI answers on top of its results. Harris Oakmark’s Oakmark Equity and Income Fund also covered Alphabet in its second-quarter letter. Read how faster Search growth powered the stock’s rally. That keeps the business that pays for everything else growing at a steady pace. Alphabet ranks second in our list of the 10 Best AI Stocks to Buy According to Billionaire Stanley Druckenmiller.
Google Cloud gives Alphabet a second engine. Cloud revenue growth sped up to 82% in the second quarter, from 63% in the first. Its profit margin rose to 35.6%, from 20.7% a year earlier. Cloud customers have signed up for far more than Alphabet can build today, and the backlog of future work is up 385% from a year ago. That means the heavy spending on data centers goes toward demand that already exists, and the main limit on growth is how fast Alphabet can build. Vulcan Value Partners says Google Cloud is now roughly 40% of its value for Alphabet. Read why the fund sees Cloud as the key to the stock.
Bear case
More than half of Alphabet’s revenue comes from Search, and that is the business AI chatbots are going after. Search is growing today, but younger users are the most open to new tools, and each query that moves away from Google hurts the biggest profit source. A slowdown there would also weaken the cash flow that pays for the data center buildout.
That buildout is the second risk. Alphabet raised its 2026 spending plan for the second time this year, to roughly double the level of 2025. Free cash flow turned negative in the second quarter, the first time since Alphabet went public, and the company sold new debt to help pay. The stock fell after that report, which shows investors will punish spending they cannot see paying off. The Insiders Fund also covered Alphabet in its second-quarter letter. Read the fund’s case against the AI spending.
Valuation
Alphabet trades at a forward P/E of 28.8. The S&P 500 trades at about 19, and Alphabet’s own five-year average is 23.0. That is a high price for the growth analysts expect in 2026. They expect earnings per share to rise 9.25% this year, which looks low because 2025 earnings included large investment gains. Revenue is expected to rise 23.8% in 2026 and 23.3% in 2027. Earnings per share are expected to rise 27.6% in 2027, which puts the P/E at about 22.8 on 2027 earnings, close to the five-year average.
The price is fair if Alphabet earns what analysts expect in 2027. Analysts raised their 2027 estimate over the past 90 days. If Alphabet earns only half of the expected growth in 2027, the P/E is still about 26, which is above the market’s 19. Investors pay a full price for Alphabet, and a weak year would hurt the stock.
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