Alphabet Drops 7% Post Q4 Earnings: Buy, Sell or Hold the Stock?

Alphabet GOOGL shares have dropped 7% post fourth-quarter 2025 results reported on Feb. 4. The drop can be attributed to investor skepticism over GOOGL’s ability to monetize its AI-infused services, given the huge capital expenditure guidance, which is now pegged between $175 billion and $185 billion for 2026. Most of this spending is marked for building AI and cloud infrastructure, including data centers, chips and servers for Gemini and cloud growth. Although Alphabet generates considerable cash flow ($164.71 billion on a trailing 12-month basis at the end of fourth-quarter 2025), this steep increase in capital expenditure is expected squeeze free cash flow ($73.27 billion on a trailing 12-month basis at the end of fourth-quarter 2025).

So, what should investors do with GOOGL stock? Let’s dig deep to find out.

AI Push Boost GOOGL’s Search & Cloud Business

Google continues to dominate the Search business with a roughly 89.82% share, followed by Microsoft’s MSFT Bing, with a 4.45% share, per the latest data from StatCounter. The company has been actively embedding AI, especially within Search, to enhance user experience, provide better AI-focused features and consequently improve ad performance. The company shipped more than 250 product launches within AI Mode and AI Overviews in the fourth quarter of 2025, and the company integrated Gemini 3 directly into AI Mode in Search. 

Upgradation of AI Overviews to Gemini 3 is offering users a best-in-class AI response at the top of the search results page. GOOGL has made the transition from an AI overview to a conversation in AI Mode completely seamless. This is driving up user experience as well as engagement. In the U.S., Alphabet saw daily AI Mode queries per user double since launch, and AI Overviews continue to perform very well. Queries in AI Mode are three times longer than traditional searches. The company is also seeing sessions becoming more conversational, with a significant portion of queries in AI Mode now leading to a follow-up question. Circle to Search is also now available on over 580 million Android devices.

Google Cloud is benefiting from Gen AI adoption due to leading models, including Gemini, Imagen, Veo, Chirp and Lyria. More than 120,000 enterprises use Gemini, including AI companies like Lovable and Open Evidence and global enterprises like Airbus and Honeywell. Moreover, 95% of the top 20 and over 80% of the top 100 SaaS companies use Gemini, including Salesforce and Shopify. Alphabet’s expanding AI infrastructure is helping it win enterprise clients. GCP’s prospects remain robust, driven by strong demand for enterprise AI infrastructure, including TPUs and GPUs, enterprise AI solutions driven by demand for the latest Gemini and other AI models, and other services, including cybersecurity and data analytics.

2026 Earnings Estimate Revisions Positive for GOOGL Stock

The Zacks Consensus Estimate for 2026 earnings is pegged at $11.57 per share, up by 4.6% over the past 30 days, indicating 7% year-over-year growth. The consensus mark for 2026 revenues is pegged at $410.04 billion, indicating 19.6% year-over-year growth.
 

Alphabet Inc. Price and Consensus

Alphabet Inc. price-consensus-chart | Alphabet Inc. Quote

The consensus mark for first-quarter 2026 earnings is pegged at $2.76 per share, up 9.5% over the past 30 days, suggesting 1.8% decline year over year. The Zacks Consensus Estimate for first-quarter 2026 revenues is pegged at $91.96 billion, implying 20.2% year-over-year growth.

GOOGL Outperform Mag 7, Shares Overvalued

Alphabet shares have jumped 67% in a year, making GOOGL the best-performing stock among the Magnificent 7 group. The shares have outperformed the Roundhill Magnificent Seven ETF (MAGS) that provides focused, equal-weight exposure to the Magnificent 7 stocks, Amazon AMZN, Apple AAPL, Meta Platforms, Microsoft, Nvidia, Tesla and Alphabet. While MAGS returned 14.3% in the trailing 12-month period, Nvidia, Tesla, and Apple have appreciated 40.4%, 20.2%, and 14.2%, respectively. However, Microsoft, Meta Platforms and Amazon have dropped 1.3%, 8.2%, and 11.3%, respectively.

GOOGL Shares Outperform MAGS

However, a Value Score of D suggests a premium valuation for Alphabet at this moment. GOOGL stock is overvalued, with a forward 12-month price/sales of 8.95X compared with the sector’s 6.54X, Microsoft’s 8.43X, Amazon’s 2.69X and Apple’s 8.56X.

GOOGL Stock’s Valuation

GOOGL Stock: Buy, Sell or Hold?

Alphabet’s growing AI-powered search capabilities and significant investments in cloud computing bode well for its prospects next year. However, capacity constraints, despite the improving pace of server deployments and data center construction, are expected to hurt Alphabet’s prospects in 2026. This, along with higher depreciation expenses and related data center operations costs, including energy, is expected to hurt profitability. Higher sales and marketing expenses are expected to keep the margins under pressure. These factors, along with GOOGL’s premium valuation, are concerning for investors in the near term.

Alphabet currently has a Zacks Rank #3 (Hold), suggesting that investors should wait for a more favorable point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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