Alphabet Inc.

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Somewhat Bullish +35

Alphabet Is Up 21% in a Year but 23% Off Its High: Take Profits, or Buy More?

Capital raising Cloud expansion Financial outlook AI-generated analysis

📉 Alphabet stock is up 21% in the past year but sits 22% below its May high after initiating a major AI buildout funded by new equity and increased capex.

💰 The company raised $49.6 billion from new stock issuance, including $10 billion from Berkshire Hathaway, while halting all share buybacks in the first half of 2026.

☁️ Google Cloud revenue surged 82% in the second quarter to drive overall revenue growth of 24%, though this expansion contributed to negative free cash flow of $5.9 billion.

📅 Third-quarter results are scheduled for release after market close on Wednesday, October 28, with analysts expecting revenue near $128 billion and a 25% year-over-year increase.

🔮 Analysts forecast normalized EPS growth of approximately 24% annually through 2028, projecting earnings per share to rise from $11.89 in 2026 to $18.16 in 2028.

⚠️ Free cash flow is not expected to return to positive territory until 2028, as the company commits to a capital expenditure guide for 2027 that exceeds current spending levels.

🤖 CEO Sundar Pichai stated that Cloud operations are prioritizing DeepMind's computing needs, effectively giving up some revenue to support internal AI research and development.

📊 The stock currently trades at a forward P/E of roughly 23x, which is right at its five-year average but significantly lower than the 33x peak reached in late April.

🏦 Google Cloud CEO Thomas Kurian claims that Alphabet's AI servers pay for themselves in under two years on an aggregate basis, with internal chips paying for themselves in about half that time.

📉 The average Wall Street price target of $422 sits approximately one-third above the current stock price, suggesting potential upside if Cloud growth remains robust.

Bullish Signals
  • Google Cloud revenue accelerated to an 82% growth rate in the second quarter, demonstrating strong demand for enterprise AI and cloud services.
  • Second-quarter total revenue rose 24% year-over-year to $119.8 billion, indicating broad-based business strength despite heavy investment in AI infrastructure.
  • Cloud operating income more than tripled to $8.8 billion last quarter, validating the high capital expenditure strategy with substantial profitability growth.
  • Analysts maintain a normalized EPS growth expectation of 24% annually through 2028, projecting earnings per share to reach $18.16 by 2028 from $11.89 in 2026.
  • The stock trades at a forward P/E of approximately 23x, which is right at its five-year average and represents a fair valuation for a company with high earnings growth potential.
Risk Factors
  • Free cash flow turned negative $5.9 billion in the second quarter, marking the first negative free cash flow quarter since Alphabet went public.
  • The company raised $49.6 billion from new stock issuance and bought back zero shares in the first half of 2026, signaling a shift away from shareholder returns to fund AI spending.
  • Alphabet raised its 2026 capex guidance to between $195 billion and $205 billion, more than double the $91.5 billion spent in 2025, increasing financial risk.
Full Analysis
Alphabet (GOOG) stock has gained 21% over the past year but remains 22% below its May high following a significant shift in capital allocation. The company is financing its AI infrastructure buildout through new equity issuance and a substantially larger capital expenditure budget, resulting in free cash flow turning negative for the first time since the company went public. Second-quarter revenue increased by 24% to $119.8 billion, driven by an 82% surge in Google Cloud revenue. However, this growth came at the cost of liquidity, with Alphabet raising $49.6 billion from new stock sales and buying back no shares in the first half of 2026 compared to $28.3 billion in the prior year. Third-quarter results are expected to be released after market close on Wednesday, October 28, providing critical data on whether Cloud's continued expansion can justify an even more aggressive spending bill for 2027. Analysts project normalized earnings per share growth of approximately 24% annually through 2028, though free cash flow is not expected to turn positive again until 2028. The article evaluates the investment case, noting that while the selloff appears overdone given the stock trades at a five-year average forward P/E of roughly 23x, the deepening cash burn and reliance on equity financing present a bearish counter-narrative. Investors are watching closely to see if Cloud's growth trajectory can sustain the massive capital outlays required for AI development.