1 Reason Alphabet Stock Is Worth Buying on This Pullback

Alphabet's (GOOG -1.45%) (GOOGL -1.40%) shares dipped over 10% on October 29, the day following its third-quarter report. Two primary reasons were cited: decelerating growth in search revenue and significant investments in artificial intelligence (AI). Data center and equipment capital spending reached over $51 billion, resulting in negative free cash flow of $9 billion.

However, this expenditure is paving the way for a compelling reason to purchase the stock dip: Alphabet's transformation into more than just a search company. Search revenue now contributes less than half of the total revenue, dropping from 55% a year ago. Non-search revenue expanded 40% year-over-year to $64 billion. Google Cloud emerged as the leading area, with revenue more than doubling and operating margin climbing to 36% from 24% the previous year.

Its backlog increased to $561 billion, suggesting that cloud business could potentially surpass Search revenue if it sustains high growth. Management anticipates a substantial increase in capital spending in 2027, which could facilitate further cloud growth by unlocking more of its backlog. Given its current trading price of 19 times 2027 earnings estimates, Alphabet stock is trading at an average valuation comparable to the S&P 500's average forward earnings multiple, presenting a potentially attractive opportunity to invest in one of the most dominant companies.