Can Google parent Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) keep up with increased competition in the search engine and cloud-services markets? The company answered this question with an exclamation mark this week.
On Wednesday, Alphabet announced its third-quarter results. The tech giant reported revenue of $88.3 billion, up 15% year over year and above the $86.3 billion consensus estimate of analysts surveyed by LSEG. It posted earnings per share (EPS) of $2.12, blowing past the average estimate of $1.85. Unsurprisingly, Alphabet's shares jumped on the better-than-expected results.
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Alphabet and Google CEO Sundar Pichai kicked off his remarks in the Q3 earnings call by stating, "The momentum across the company is extraordinary." While top executives are always cheerleaders for their companies, Pichai's enthusiasm appears to be warranted. Artificial intelligence (AI) is the biggest reason for his optimism.
After the launch of OpenAI's ChatGPT, skeptics predicted that generative AI could be a "Google killer." Roughly two years later, we're seeing a much different reality. Google's AI Overviews feature, which combines generative AI with its search engine, now reaches more than 1 billion monthly users.
Worries that this would hurt the company's bottom line were overblown. Pichai said in the Q3 call that Google has slashed machine costs per query by more than 90% over the last 18 months. He added, "The integration of ads within AI Overviews is also performing well, helping people connect with businesses as they search."
Alphabet's Google Cloud business is booming. The cloud unit raked in $11.4 billion in Q3, a 35% year-over-year increase. Google Cloud is now a major contributor to the company's overall profitability.
Concerns about the threats to YouTube from rivals such as TikTok have also proven to be more smoke than fire. YouTube ads revenue jumped 12% year over year in Q3 to $8.9 billion. Over the last four quarters, YouTube generated combined ad and subscription revenue of over $50 billion for the first time ever.
Alphabet's Waymo unit now transports over 150,000 paid customers and drives more than 1 million miles weekly -- all fully autonomously. Pichai claimed, "Waymo is now a clear technical leader within the automated vehicle industry and creating a growing commercial opportunity."
AI is making a huge difference for Alphabet internally, too. Over 25% of new code created within Google is now generated by AI. Sure, engineers review the code before accepting it. However, this is a major milestone in productivity for the company.
The best Magnificent Seven stock?
Does this momentum make Alphabet the best Magnificent Seven stock? Not necessarily. Other members of the Magnificent Seven are also enjoying strong AI tailwinds. However, Alphabet compares favorably against several of them.
Microsoft reported strong revenue growth in its latest-quarterly update. But its stock tumbled after the earnings release this week because of lower-than-expected guidance.
Meta Platforms beat Wall Street's estimates with its Q3 earnings. Its shares fell, though, because of analysts' concerns about a significant increase in capital expenditures next year.
Tesla stock soared after the company announced better-than-expected earnings and upbeat guidance for 2025 last week. However, its stock still lags well behind Alphabet's performance this year.
Amazon and Apple hadn't reported their quarterly results at the time of this writing. But regardless of how impressive their numbers might be, Alphabet beats them both on one important front: valuation. Alphabet's price-to-earnings-to-growth (PEG) ratio of 1.16 is well below the forward-earnings multiples of Amazon and Apple.
I think the Magnificent Seven stock that gives Alphabet the biggest run for the money right now is Nvidia. However, there's still some mystery about how much growth Nvidia will report in its Q3 update scheduled for Nov. 20.
Alphabet's dark cloud
Probably the main factor that could prevent Alphabet from being the best Magnificent Seven stock to buy right now is the uncertainty related to antitrust lawsuits. A federal judge already ruled that Google is monopolizing the search engine market. Another lawsuit filed by the U.S. Department of Justice and several states alleges that the company also holds a monopoly with its online-advertising technology.
It's possible that Alphabet could be broken up as a result of these antitrust actions. Even if not, the company could be forced to change its business practices in ways that hurt its long-term growth prospects.
Alphabet's current momentum is impressive enough to put it in the upper echelon of Magnificent Seven stocks if not at the top. However, the dark cloud hovering over the company with its antitrust risks diminishes the magnificence somewhat.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. Keith Speights has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. 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.
