Alphabet (NASDAQ:GOOGL) shares fell 7% following its fourth-quarter 2025 earnings report on February 4, as investors questioned the company’s ability to monetize AI-powered services amid a heavy capital expenditure plan for 2026. The company has projected $175 billion to $185 billion in spending, largely focused on AI and cloud infrastructure, including data centers, chips, and servers for Gemini and cloud growth. While Alphabet generates strong cash flow—$164.71 billion on a trailing 12-month basis at the end of Q4 2025—this steep increase in capex is expected to pressure free cash flow, which totaled $73.27 billion for the same period.
AI Push Strengthens Search and Cloud
Alphabet is embedding Gemini into Search and Cloud, enhancing AI queries, engagement, and enterprise adoption. Google continues to dominate the U.S. search market with an 89.82% share, compared with Microsoft’s (NASDAQ:MSFT) Bing at 4.45%, according to StatCounter. Fourth-quarter 2025 saw over 250 AI-focused product launches, including integration of Gemini 3 into AI Mode in Search, improving conversational search experiences. AI Mode queries per user in the U.S. have doubled since launch, with sessions three times longer than traditional searches, indicating strong engagement.
Google Cloud is benefiting from enterprise adoption of Gemini and other AI models such as Imagen, Veo, Chirp, and Lyria. Over 120,000 enterprises, including Airbus, Honeywell, Salesforce, and Shopify, use these AI tools. This growing AI infrastructure is driving demand for TPUs, GPUs, and enterprise AI solutions, positioning GCP for strong growth.
2026 Earnings Estimates Remain Optimistic
The Zacks Consensus Estimate for 2026 earnings stands at $11.57 per share, up 4.6% over the past 30 days, representing 7% year-over-year growth. Revenue estimates for 2026 are $410.04 billion, reflecting 19.6% growth. First-quarter 2026 estimates are $2.76 per share in earnings, slightly down year-over-year, and $91.96 billion in revenue, a 20.2% increase.
Alphabet Stock Outperforms Magnificent 7
GOOGL shares have risen 67% over the past year, outperforming the Roundhill Magnificent Seven ETF (MAGS), which holds Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Meta Platforms, Microsoft, Nvidia, Tesla, and Alphabet. While MAGS returned 14.3%, individual Magnificent 7 stocks varied, with Nvidia up 40.4%, Tesla 20.2%, Apple 14.2%, Microsoft down 1.3%, Meta down 8.2%, and Amazon down 11.3%.
Despite strong growth, Alphabet’s valuation is a concern. Its forward 12-month price-to-sales ratio is 8.95x, above the sector average of 6.54x and higher than peers including Microsoft (8.43x), Amazon (2.69x), and Apple (8.56x). Zacks Investment Research assigns Alphabet a Value Score of D, indicating the stock is overvalued.
Buy, Sell, or Hold Alphabet Stock?
Alphabet’s AI-driven search enhancements and cloud expansion bode well for long-term prospects, but near-term risks remain. Higher depreciation, data center costs, energy expenses, and elevated sales and marketing outlays are expected to pressure 2026 margins. Capacity constraints, despite faster server deployments, could further limit profitability.
GOOGL currently carries a Zacks Rank #3 (Hold), suggesting investors wait for a more favorable entry point before accumulating shares. While AI growth presents exciting opportunities, cautious investors may prefer to observe short-term performance and valuation before committing. Additionally, potential regulatory scrutiny over AI applications and advertising practices could add volatility to the stock in the coming quarters. Investors should also monitor macroeconomic indicators and interest rate trends, as higher borrowing costs may indirectly affect the company’s expansion plans. Overall, GOOGL remains a long-term growth story with near-term risks that warrant measured exposure.
Investors should also keep an eye on Alphabet’s competitive positioning against other AI leaders such as Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA). As AI adoption accelerates, maintaining market share in search and cloud will be critical for sustaining revenue growth. Strategic partnerships, product innovation, and efficient capex allocation will likely influence Alphabet’s stock performance throughout 2026.
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