Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) had a rough Tuesday, with shares sliding nearly 2% as mega-cap tech stocks took a breather. The Nasdaq slipped 0.13%, and the S&P 500 edged down 0.08%. But while the broader Communication Services sector actually gained 0.18%, Alphabet couldn't keep up.
Market breadth was slightly positive, with six of the 11 major sectors trading higher and an advance-decline ratio of 1.2. Investors seemed to favor defensive and cyclical plays, with Energy leading the pack (up 1.23%) and Industrials rising 0.65%. Tech, it seems, was not the place to be on this particular Tuesday.
BNP Paribas Stays Bullish
Despite the day's dip, Wall Street's longer-term view on Alphabet remains rosy, especially as artificial intelligence continues to reshape its advertising and cloud businesses. BNP Paribas analyst Nick Jones is one of the believers, and he's not shy about it.
"We continue to view Alphabet as well positioned to be an AI winner," Jones said, pointing to healthy advertising trends, rising cloud demand, and the company's vertically integrated tech stack as key drivers.
Jones maintained an Outperform rating and set a $420 price target, which is based on a 30-times multiple on 2027 estimated earnings. He argues that Alphabet's current 2027 P/E of about 23 times doesn't fully capture the company's strengths across infrastructure, models, distribution, consumer adoption, enterprise use, and digital advertising. In other words, the market might be undervaluing just how much AI can boost Alphabet's bottom line.
AI and Cloud: The Investment Engine
Jones noted that AI and cloud demand continue to justify elevated investment and a broader strategic push. Alphabet has reiterated plans for a significant increase in fiscal 2027 capital spending, though depreciation could become uneven as new data-center capacity comes online. That's a fancy way of saying: they're spending big, and the costs will show up in the financials, but the payoff could be huge.
One interesting nugget: Jones said Alphabet expects some TPU (Tensor Processing Unit) sales this year, with the bulk coming in 2027. TPUs are Alphabet's custom AI chips, and Jones believes they could open up a new market and expand the company's total addressable market. So not only is Alphabet selling AI services, but it might also become a chip vendor, competing with the likes of Nvidia.
Advertising: Still the Cash Cow
Underlying advertising trends remain strong, and AI is making them even better. Alphabet says AI is improving targeting, relevance, and measurement, while also helping small and medium-sized businesses optimize their creative. In Search, AI allows users to ask more complex questions, giving Alphabet's ad systems more opportunities to understand intent and tailor ads over time. It's a virtuous cycle: better AI leads to better ads, which leads to more revenue, which funds more AI.
Margins: The Cloud on the Horizon
But it's not all sunshine and roses. Jones pointed out that several one-time items hit second-quarter margins, including a $1.5 billion legal fine in Google Services' general and administrative expenses and a digital-services tax reversal benefit. And as new capacity comes online, rising depreciation will pressure margins, even as cloud backlog, enterprise AI adoption, and advertising demand strengthen the longer-term outlook. So while the future looks bright, the path there might have some potholes.
The stock currently carries a Buy rating with an average price target of $418.60. Recent analyst moves include JPMorgan (Overweight, price target lowered to $420), TD Cowen (Buy, $475 price target), and Oppenheimer (Outperform, price target lowered to $400).
ETF Exposure: A Double-Edged Sword
For ETF investors, Alphabet's heavy weight in several funds is worth noting. The State Street Communication Services Select Sector SPDR ETF (NYSE: XLC) has an 8.89% weight in the stock, the Motley Fool 100 Index ETF (BATS: TMFC) has 8.64%, and the Principal Focused Blue Chip ETF (NASDAQ: BCHP) has 9.35%. Because GOOG carries such a heavy weight in these funds, any significant inflows or outflows for these ETFs will likely force automatic buying or selling of the stock. That can amplify moves in either direction, so keep an eye on fund flows if you're watching Alphabet.
Price Action
At the time of publication on Tuesday, Alphabet shares were down 1.69% at $349.82, according to market data. The stock has been on a rollercoaster lately, but analysts like Jones see the long-term trend pointing up.
