Freedom recommended buying Alphabet stock after the pullback. What could hinder its growth?

Analysts at Freedom Broker have upgraded their rating on shares of Google’s parent company, Alphabet, raising it from “neutral” to a “buy” recommendation. They maintained their price target at $400, which implies upside potential of 26% relative to the closing price on July 23.

The day before, Alphabet’s stock price plummeted 7% as investors were spooked by the company’s plans to increase its already massive capital expenditures. Over the past month alone, the stock has lost about 10% of its value. Despite the pressure that multibillion-dollar investments in AI are putting on free cash flow, Alphabet’s stock has become more attractive following the decline, according to Freedom.

Alphabet remains one of the key beneficiaries of the digital economy’s growth, channeling its investments in AI into growth in search advertising, cloud services, and subscription products, analysts note in a report available to Oninvest.

Freedom notes that Google Cloud has become the company’s main growth driver. Against the backdrop of strong demand for AI infrastructure, revenue from this segment surged 82% in the second quarter, significantly exceeding Wall Street’s expectations. Google Cloud’s order backlog increased by more than $50 billion, reaching $514 billion, and the rate of new customer acquisition more than doubled.

The search business will also remain a powerful catalyst for growth: the introduction of AI features such as AI Overviews and AI Mode is driving an increase in the number of search queries and creating new monetization opportunities, including advertising formats and agent-based commerce—that is, AI services designed to facilitate purchases, according to Freedom.

Analysts also noted that Alphabet could improve its margins by using its own TPU chips and boost revenue through YouTube Premium and YouTube TV, which operate on a subscription basis. Stronger growth in YouTube Ads has already made a significant contribution to revenue growth, the note states.

The increase in Alphabet’s capital expenditures has caused the company’s free cash flow to turn negative. At the same time, it warned that it would continue to expand these investments: the spending forecast for 2026 has been raised from $190 billion to $195–205 billion. Alphabet acknowledged that this will put increasing pressure on its operating margin.

“We take a neutral view of the company’s results, as the growth of the Google Cloud segment confirms demand for AI infrastructure; however, the increase in capital expenditures and related costs is limiting improvements in long-term profitability and offsetting the positive impact on the company’s valuation,” Freedom wrote.

Analysts also cite the development of alternative AI interfaces—which could gradually limit the growth of advertising revenue—as well as the uncertainty surrounding the outcome of antitrust litigation, increased competition in the market, and a reduction in advertising budgets in the event of a global economic slowdown.

The overwhelming majority of analysts covering Alphabet stock recommend buying it. Only eight out of 72 strategists suggest holding the stock in a portfolio—that is, neither reducing nor increasing the position. There are no sell recommendations.

This article was AI-translated and verified by a human editor