Down 16%, Should You Buy the Dip on Alphabet? | The Motley Fool

By zooming out, it becomes obvious that Alphabet (GOOGL -0.01%) (GOOG 0.06%) has been a huge winner for investors. Shares have surged 144% in the past five years, and they’re up an impressive 525% just in the last decade. Becoming a dominant internet enterprise has resulted in some very happy shareholders.

But as of this writing on May 28, this top technology stock trades 16% below its high, which was reached on Feb. 4. Should you take advantage of the market’s pessimism and buy the dip on Alphabet right now?

Is AI a risk or an opportunity?

With the proliferation of generative artificial intelligence (AI) tools in recent years, investors have rightfully been concerned that Alphabet’s crown jewel, Google Search, that represented 56% of sales in the first quarter, would be disrupted. That’s because it’s believed that users would turn more to AI when seeking out information on a variety of topics, pulling traffic away from Google Search. In turn, this could negatively impact advertising revenue.

So far, it appears these fears are overblown. First off, Google Search still commands a whopping 90% of global market share when it comes to search engines. Additionally, Google Search saw revenue increase 10% year over year in Q1. And that $50.7 billion sales figure is up 28% from the same period three years ago.

Lastly, it’s worth pointing out that Alphabet isn’t resting on its laurels. The company has clearly made AI a top priority. At its annual Google I/O developer conference in May, Alphabet did not disappoint. A notable 100 updates were announced, with new AI features coming across the board.

Alphabet is already finding ways to make money from AI. “For AI Overviews, overall, we continue to see monetization at approximately the same rate,” Chief Business Officer Philipp Schindler said on the Q1 2025 earnings call when comparing Overviews to traditional search.

And when it comes to advertising customers, AI is helping them create more effective marketing campaigns that can increase return on spend and enhance targeting capabilities.

In Q1, Alphabet generated $34.5 billion in net income. This puts it in an enviable position to keep plowing sizable financial resources into AI initiatives to bolster its competitive standing.

Alphabet’s economic moat

Alphabet’s wide economic moat is a key factor that highlights just how outstanding of a business this really is. The company benefits from powerful network effects within Search and YouTube. There are invaluable, intangible assets at play, like the Alphabet and Google brands, unrivaled technological know-how, and the ability to collect unbelievable amounts of data that can directly impact strategic decisions.

There is also a cost advantage, particularly with Google Cloud. The platform requires huge fixed costs to build out the infrastructure. This explains why the segment was unprofitable for a long time. However, now that revenue has scaled up to $49 billion on an annualized run-rate in Q1, Google Cloud is boosting the bottom line. Operating income totaled $2.2 billion in the first three months of 2025.

Google Cloud’s customers also deal with high switching costs. Once they onboard and start to depend on Alphabet as its mission-critical IT partner, it makes sense why they would be inclined to stay put unless they want to cause potential operational disruptions.

Trading at a discount to the market

Investors will notice that Alphabet’s valuation is too hard to ignore. Shares trade at a price-to-earnings (P/E) ratio of 19.2. This is a discount to the S&P 500 Index, which just doesn’t seem warranted given the quality of this business. And of all the “Magnificent Seven” stocks, Alphabet is the cheapest.

Finding such a great deal in the stock market can make investors think that they’re overlooking something. However, it’s best not to overanalyze the situation. Alphabet is a smart buy while on the dip.