Key Points
Alphabet’s revenue growth accelerated to 18% year over year in the fourth quarter of 2025.
Google Cloud produced about $17.7 billion of fourth-quarter revenue.
Alphabet trades at a price-to-earnings ratio of about 29.
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While shares of Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) have underperformed the S&P 500 so far in 2026, investors should remember that the stock is up more than 70% over the last 12 months. So, a modest lag as the S&P 500 gains 1% year to date seems reasonable.
The bigger question is whether, with such a monstrous gain in the rearview mirror, it’s too late to buy the stock. Investors buying the stock today have to pay a substantially higher valuation for the Google parent company than they did 12 months ago. Is the stock worth this valuation? Or should they wait to see if they get a better entry point into the tech stock?
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Accelerating growth
To understand why the Street has been so optimistic about Alphabet’s business over the last 12 months, look at its accelerating year-over-year revenue growth trends in recent quarters. After growing its top line 12% year over year in the first quarter of 2025, this growth rose to 14% in Q2, 16% in Q3, and finally 18% in Q4.
And even this accelerating trend arguably understates its momentum. Probably the bigger thing exciting investors recently has been the accelerating growth of Google Cloud, its cloud computing business. Google Cloud revenue rose 28% year over year in Q1, 32% in Q2, 34% in Q3, and a staggering 48% in the fourth quarter of 2025.
And there’s plenty of evidence that the company is succeeding in AI. Not only is AI showing up across Alphabet’s entire business, but its AI app Gemini has now grown to over 750 million monthly active users. Further, Alphabet CEO Sundar Pichai said in its fourth-quarter update that “Search saw more usage than ever before, with AI continuing to drive an expansionary moment.”
Given the stark difference in Alphabet’s growth rates between its most recently reported quarter and the first quarter of 2025 and the clear momentum the company was seeing in AI at the end of 2025, the company arguably deserves its much higher valuation today than it did a year ago.
A look at Alphabet stock’s valuation
Interestingly, despite the stock soaring more than 70% over the past 12 months, Alphabet shares aren’t necessarily expensive today. As of this writing, the stock trades at a price-to-earnings ratio of about 29 — not bad for a company that saw revenue grow 18% year over year in Q4 and has an important catalyst in Google Cloud, which posted 48% year-over-year revenue growth in Q4.
And keep in mind that while technology in general is considered risky, Alphabet’s business is fairly diversified. Yes, about $82 billion of its approximately $114 billion of fourth-quarter revenue came from advertising. But about $13.6 billion of that revenue came from Google subscriptions, platforms, and devices, and about $17.7 billion from Google Cloud.
Additionally, Alphabet has a spectacular balance sheet. It ended 2025 with nearly $127 billion of cash, cash equivalents, and marketable securities, up from about $96 billion in 2024. And the company operates with a significant net cash position; its long-term debt at the end of 2025 is just $47 billion.
Of course, you can’t talk about big tech companies these days without discussing their capital expenditures budget, and Alphabet’s is big. The company plans to spend between $175 billion and $185 billion in capital expenditures in 2026. With net cash provided by operating activities in 2025 coming in at about $165 billion, it looks like Alphabet plans to spend most, if not all, of its operating cash flow in 2026.
Big spending like this, of course, raises the stock’s risk profile. But it also increases the potential reward if these investments pay off handsomely over the long haul. And given that Alphabet is historically a good steward of capital, odds are this big spending spree will yield a good return on investment. But given the sheer scale of its capital expenditures and the fact that tech companies are undergoing a transformative phase driven by AI, the stock may require an unusual amount of patience from investors.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
