Shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) fell 22.1% in the first quarter of 2025, according to data from S&P Global Market Intelligence. Google's parent company saw a disappointing fourth-quarter report and the same tariff-based issues as everyone else.
How Google's Q4 report caused a market retreat
Let's start with the earnings debacle.
Alphabet's Q4 report was a mixed bag, with solid bottom-line earnings but revenues just below the consensus analyst target. The Google Cloud business struggled a bit, while YouTube and search-based sales came in above expectations. But the stock closed 7.3% lower the next day, mostly due to high expectations from this holiday-quarter report.
The soft Google Cloud sales sprung from one of the nicest problems a company can have: Customer demand for Alphabet's artificial intelligence (AI) services is too high, and it's difficult to build out the supporting infrastructure fast enough. In response, Alphabet will boost its capital expense budget to $75 billion in 2025, 43% above last year's total. The extra dollars are earmarked for data centers and engineering assets in the AI space.
Some investors see nothing but lower free cash flows in that accelerated AI spending spree. Combined with mixed headline-figure results, that was enough to send Alphabet's stock dramatically lower, erasing December's boost from an impressive quantum computing achievement.
Looking way beyond one challenging quarter
Alphabet shares have largely followed the broader market's swings in the last year, though its swings to the upside and downside have been a bit exaggerated.
As a leader in next-generation technology areas such as generative AI, quantum computing, and self-driving vehicles, the company should outperform Wall Street's general trajectory in the long run. Alphabet's vote-endowed Class A stock has seen a compound average growth rate (CAGR) of 20.1% over the last five years, far ahead of the S&P 500 (SNPINDEX: ^GSPC) index's 15.5% CAGR in the same period.
That's the type of market-beating returns I expect from Alphabet in the long haul. This company was built for flexibility, always ready to roll with the market's punches and take the lead in most of the generation-switching sea changes along the way. It's not always smooth sailing, and the stock needs a quick correction when it soars too high, but that's not a problem right now.
Long story short, Alphabet stock looks like a great buy after a significant price drop in the first quarter.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
