Google’s cloud business has big opportunity ahead once it adds capacity. Meanwhile the stock is cheap relative to historical levels.

Alphabet reported blowout earnings on Thursday.

Investors have spent the better part of the year dumping high-risk tech stocks in fear of a macroeconomic slowdown. All the while, Alphabet Inc. was riding out a solid first quarter. 

On Thursday, the Google parent company reported first-quarter earnings per share of $2.81, beating the FactSet consensus of $2.01, while revenue came in at $90.2 billion, beating expectations for  $89.2 billion. Additionally, the company announced a new $70 billion share-buyback program and said it would increase its dividend by 5%.

“Alphabet didn’t just crush estimates, it flaunted amazing resilience,” Kevin Cook, a strategist at Zacks Investment Research, said in an email.

You can say that all the usual goodies were in the bag, but during the question portion of Alphabet’s earnings call, analysts had four overarching concerns about the company’s standing for the year. Those were macroeconomic headwinds, the financial transition related to artificial-intelligence search results, cloud growth and capital spending.

Cook noted that the pessimism made it seem like analysts had “forgotten that Google is at the center of every innovation happening in the AI economy.”

It makes sense why investors were worried about the advertising landscape, since ads represent a big chunk of the search giant’s revenue stream — about 75%, according to a report from Jefferies analyst Brent Thill. The fear has been that ad spending will come under pressure if businesses cut back on marketing due to an economic slowdown or reduce their own costs in the face of tariffs.

But for now, Google is safe on that front, as its advertising revenue came in strong at $66.9 billion, up 8.5% from a year ago. Still, Morningstar analyst Malik Ahmed Khan noted that it was too early to expect to see any major impacts on ad spending. The effects of recent tariff announcements could be felt more later in the year.

The company ducked questions from analysts seeking guidance on what ad revenue could look like for the remainder of the year. However, the company did acknowledge that Alphabet would not be immune to the macroeconomic environment. Google executives also noted that the halting of the “de minimis” tariff exemption for goods worth less than $800 would impact ad spending from retailers.

Investors have also been worried about the rise in AI search results, which could also reduce click-through rates.

But Chief Business Officer Philipp Schindler told listeners that Google was monetizing AI Overviews “at approximately the same rate” as traditional search results. Additionally, he said Google’s AI tools were helping advertisers better target consumers.

Then there’s Google Cloud, which is a high-growth, high-margin part of the business. Revenue from cloud services came in at $12.26 billion for the quarter, about even with what analysts tracked by FactSet were expecting. That marked a 28.1% increase from a year earlier, though below the 30.1% growth rate seen in the December quarter. Executives noted that there were capacity constraints that would be met by the end of 2025 as Google continues building out infrastructure. 

Stepping back from the qualitative details, investors have dumped the stock so aggressively that it’s now in a good buying range. Shares are down 15.3% this year. The first-quarter pop in EPS could either lend itself to expectations of stronger earnings for the remainder of the year or mark its peak, with the latter being more likely. Revenue, though, is expected to continue growing.

Despite questions around future earnings, the stock’s selloff has brought its price-to-earnings ratio — how much an investor pays per dollar the company earns — to the lower end of its recent historical range, which means investors can pay less for more earnings.

Alphabet trades at 17 times estimated earnings for the next 12 months. Over the past seven years, its average forward P/E sits at 23, with a high near 30 and lows near 17, according to data compiled by FactSet. With Alphabet’s current forward P/E around that low end, the stock is undervalued, despite the risks ahead. 

Below is a chart that shows the stock’s price relative to its forward P/E.

Photo: FactSet