$GOOGL · Parkev Tatevosian, CFA · 2026-11-07

Alphabet's stock was already in a downtrend after hitting around $400 a share, but after the company announced its quarterly results, the stock fell an additional 10%.

Investors ask me: "What do I think of the results? Do I think it's a buying opportunity? What should I do with my shares? Am I interested in buying more Alphabet shares? etc."

Then I will share with you my discounted cash flow model, which calculates the fair value of Alphabet stock. Finally, I will answer whether I think it is a buying opportunity, and whether I am interested in buying more at these levels.

Revenues increased by 25%, a strong growth rate compared to the same period last year.

Research and development spending rose by 36%, driven by investments in AI-specialized talent, as well as consumption. Since Alphabet is optimizing its capital allocation reasonably, I am satisfied with that.

I wouldn't mind seeing Alphabet invest more in research and development. But thanks to revenue growth, I was able to achieve 30% growth in operating profit even after spending more money.

This in particular disappointed me greatly, especially since, as soon as SpaceX went public and the share price rose, I was demanding that Alphabet get rid of all its shares in SpaceX.

In my opinion, it was greatly overvalued immediately after it was offered for subscription, and I wish it had been. But instead, she kept it. I don't know if there were restrictions on selling their shares, but they held onto their SpaceX shares, and now they incurred a loss of $8.2 billion in the last quarter as a result of their investment in SpaceX.

I hope they get rid of all the SpaceX shares they own. As an Alphabet shareholder, I urge Alphabet to divest all SpaceX shares it can sell without affecting its strategy.

I know that SpaceX is an Alphabet customer, and I don't know if it would remain so if Alphabet sold its shares.

This makes me curious to understand the situation, but in terms of valuation and use of capital, I would prefer to invest this capital elsewhere. Therefore, I was relieved to learn that one of the reasons for the lack of increased operating cash flow in the last quarter compared to the same quarter last year was the accumulation of inventory of power processing units (TPUs).

I know for certain that the demand for these Tensor Processing Units (TPUs) has been enormous, and the same applies to Amazon and its own chips. There is increasing demand for chips that improve smart computing, so they are likely to generate significant sales.

It has already achieved remarkable sales growth, so this situation is likely to be reflected in the next quarter as these units are sold and cash is obtained.

Its balance sheet remains in excellent condition despite borrowing and selling large quantities of shares. It does this in anticipation of its future needs, not to meet its current needs, as it has more than $265 billion in cash and marketable assets, and $125 billion in long-term debt.

It can use its cash reserves to pay off all its debts, and it will still have $140 billion left. Therefore, its balance sheet is in excellent shape, but it is doing so in anticipation of its future needs, as it has future purchase commitments of $924 billion in leases and other commitments of $152 billion.

But they emphasize here that this is just the maximum limit of the contractual commitment, and that many of these agreements feature flexibility in pricing and quantity, which may lead to reduced spending.

I believe Alphabet also indicates this. For example, this is the maximum amount they will spend on some of these components and leases that they have agreed to use, but this does not necessarily mean that it will be the maximum.

This is the maximum, and it is very likely that spending will be less than this level.

Google Cloud achieved revenue growth of over 100% in the last quarter, has a backlog of orders worth $561 billion, and management expects to convert 55% of these orders into revenue within the next 24 months.

That is, about $280 billion out of $560 billion will be converted into revenue over the next two years. This is an amazing achievement considering how new Google Cloud is and its projections of generating over $100 billion in annual revenue over the next 24 months.

As I mentioned earlier, TPU system sales continue to grow during the last quarter, followed by a significant increase in revenue in 2027.

The demand for these chips is enormous. I wouldn't be surprised if the figure approached $300 billion by 2027. It wouldn't surprise me if the figure ranged between $250 and $300 billion from Alphabet, and it certainly wouldn't surprise me from Amazon.

The budgets of this sector are increasing significantly, and this is a result of the law of supply and demand. As you can see, Google Cloud's business has achieved 100% revenue growth and has a backlog of orders exceeding $500 billion.

Of course, you would want to build the kind of business that has customers waiting in line, giving you billions of dollars to buy any product you develop as soon as it's released.

Here is something that I believe investors do not appreciate enough: the return on investment. They have repeatedly emphasized during this investment cycle that they expect to achieve an attractive return on invested capital, which remains well above the cost of capital, and they expect to generate a strong cash flow from operations.

In fact, if we look at Alphabet to determine its credibility when it makes this type of prediction, has it ever done so before? Or are they simply marketing in the hope of achieving results they have never achieved before?

In fact, they have been relatively effective in allocating capital, and are improving in this respect. Their return on invested capital has exceeded 30% since 2026, and even exceeded 30% since 2025, and recently reached 38%.

This is equivalent to three times the company's weighted average cost of capital.

Speaking of the weighted average cost of capital, I calculated it at 9.8%. I do this as part of my assessment of the company's discounted cash flows, which estimates the amount of cash flow I believe the company will generate between today and the very distant future.

I discount these cash flows using the cost of capital because the value of money in the future is less than the value of money in our pockets today. At the end of these calculations, I concluded that the company is worth $354 per share, while the current market price is $279.

Therefore, the stock appears to be undervalued using this valuation method.

Looking at the valuation using the price-to-earnings multiple, we find that the stock is trading at 18.6, which I also consider to be undervalued. Therefore, regardless of the valuation method used, Alphabet stock appears to be undervalued.

Based on these factors, and to answer the question I posed in the title, I believe that Alphabet stock represents a buying opportunity. I have great confidence in this assessment.