Tech Stock Goes On Sale After Earnings
We’re in the middle of earnings season and Wednesday was a big day for tech stocks.
In particular, it was a huge day for one major tech company.
Alphabet Inc. (ticker: GOOGL) reported earnings and blew everyone away.
It reported a 23% increase in revenue as well as an almost 300% increase in earnings per share (EPS).
It was a crazy good quarter for the massive tech stock.
Alphabet’s quarterly EPS was the highest in the company’s history!
So, Alphabet’s stock price must have skyrocketed, right?
Unfortunately for Alphabet investors, the stock price crashed instead.
Alphabet reported after the market closed on Wednesday, so most of the damage was done the next day.
Its stock price dropped over 7%, which was a huge drop for such an amazing quarter.
What happened?
First, Alphabet’s amazing quarter has a bit of an asterisk.
Its 23% revenue growth is a huge accomplishment, especially for a company with over $100 billion in revenue per quarter.
However, most of its earnings growth came through gains on equity securities.
Last quarter, Alphabet made almost $100 billion just on equity gains, which are responsible for most of its growth in EPS.
Now, what are equity gains for a company like Alphabet?
You can think of it similarly to unrealized gains on stocks we own.
We haven’t sold the stock, so we actually haven’t made any money or generated any cash.
The same thing is happening with Alphabet.
The company made a huge amount of money in some of its investments, particularly from the IPO of SpaceX (ticker: SPCX) last month.
But the money doesn’t help Alphabet until it sells its shares of SpaceX.
Now, if Alphabet were an asset manager or a hedge fund, making almost $100 billion in investments would be great news.
However, Alphabet is a tech company, and its business isn’t investing in other companies.
If Alphabet’s earnings growth were from higher ad revenue from YouTube or from more Google Cloud users, then we could be excited.
But these stock gains are a one-time thing and not the core of Alphabet’s business.
Second, Alphabet’s free cash flow went negative for the first time in its 22-year history as a public company.
Free cash flow is a really important number, as it measures how much cash a company generates after paying for investments in the business.
These investments are called capital expenditures (or capex), and Alphabet is spending a ton.
Last quarter, Alphabet spent almost $45 billion on capex, which is more than double what it paid in the same quarter in 2025.
And company management expects capex to reach around $200 billion for the entirety of 2026, and increase even more into 2027.
What is Alphabet spending all of the billions of dollars of capex money on?
Alphabet is investing heavily in its cloud computing business, whose revenues grew over 80% compared to last year, mainly from AI.
The cloud segment needs a lot of computing power, which includes semiconductor chips, servers, and data centers.
There’s a lot going on here, but here’s why Alphabet’s stock price is dropping.
All of the capex money is a huge investment for Alphabet.
And if the AI boom doesn’t materialize, all of the semiconductor chips and servers Alphabet bought will be collecting dust.
There’s still a lot of anxiety surrounding AI, especially whether or not these AI developers can start making money on their products.
However, Alphabet is trading at an excellent price right now.
If AI takes off, then Alphabet’s cloud business will explode.
But if AI falters, Alphabet still has plenty of other profitable businesses including YouTube and Google Search to fall back on.
We also can’t ignore Alphabet’s incredible financials.
Alphabet’s profit margin is inflated because of gains from the SpaceX investment, but its operating margin of 33% over the past 12 months is an all-time high.
And Alphabet’s price-to-book (P/B) ratio of 6.3x is lower than its 5-year historical median, so we’re getting the stock at a great price.
Do you think these tech companies are spending too much money on AI?
Send me a note to let me know what you think!
Coach Parker
Category: Stocks
