While Wall Street reacted positively to Alphabet’s (GOOGL) Q3 results, I believe shares remain undervalued, presenting a compelling opportunity today. Alphabet’s core business segments, like Google Search and YouTube, remained robust and displayed impressive growth in Q3. However, the true highlight of the report was Google Cloud, which not only recorded a notable acceleration in revenue growth but also saw substantial operating income gains. Yet, Alphabet’s valuation doesn’t seem to fully reflect its ongoing momentum. For this reason, I remain invested in Alphabet, confident about the potential for upside in the stock.
Alphabet’s core revenue segments, Google Search and YouTube, once again posted solid numbers in Q3, reinforcing the company’s position as a digital advertising and search leader. Although I hear concerns from investors and analysts about Alphabet’s lagging position in the large language model (LLM) search arena, the company continues to attract increasing advertising revenue.
Specifically, Google Search saw a 12% revenue increase year-over-year, with management citing growing user engagement fueled by recent AI tools like AI Overviews and Circle to Search. AI Overviews has now been rolled out to over a billion users worldwide, enabling more complex queries and expanding how people interact with Search. Circle to Search, another AI feature that lets users draw a circle around an object in an image to search for similar items directly, is now active on over 150 million Android devices.
The Circle to Search feature has been quite popular. Management reported that one-third of those who have tried it are now using it weekly, which translates to a strong indicator of its value.
Meanwhile, YouTube recorded a 12% growth in ad revenue, driven by brand and direct-response ads. The platform’s progress in creating a more TV-like experience, including features like multiview, has definitely boosted its appeal, particularly in the living room space. Shorts is also doing really well, with monetization getting stronger again this quarter. It’s interesting to see how quickly it’s catching up to the in-stream video, especially in the U.S. and other high-ad revenue markets. Notably, 70% of channels uploading to YouTube each month post Shorts, helping Alphabet pull in even more ad dollars.
Beyond Alphabet’s core segments performing well, the real standout in Q3 was Google Cloud, a major driver of my bullish outlook on the stock. The segment saw its revenue surge by 35% year-over-year, accelerating from the prior quarter’s 29% growth and well above last year’s 22%. This acceleration is powered by Alphabet’s ever-growing AI infrastructure, including the Gemini models, which power solutions in multimodal AI and real-time analytics.