AI is lifting engagement in search.

Alphabet’s growth in cloud accelerated in Q3.

Valuation has moved higher but still looks reasonable against fundamentals.

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After a bruising sell-off earlier this year, Alphabet’s (NASDAQ: GOOGL) (NASDAQ: GOOG) stock has ripped higher – up just more than 70% over the last six months, as of this writing. The move upward accelerated after the company posted a milestone quarter after the market closed on Oct. 29 and leaned into a simple message: Artificial intelligence isn’t eroding Google’s core; it’s expanding it.

Initially, investors worried about the impact of AI (artificial intelligence) on Alphabet, which is best known for Google Search and YouTube but also operates a fast-growing cloud platform. But sentiment about AI’s role in Alphabet’s business has been flipping over the last few months. And in its most recent report, it was clear: AI is now a substantial headwind for the company – across Search, YouTube, and Cloud.

Image source: Getty Images.

Alphabet delivered its first-ever $100 billion quarter, with revenue up 16% year over year to about $102.3 billion, and earnings per share rising 35% year over year $2.87. Revenue in the company’s core Google Search and other segment climbed 15% year over year, while YouTube ads revenue grew by the same amount to just over $10 billion.

Additionally, the company’s important and fast-growing cloud computing business, Google Cloud, saw revenue rise 34% to $15.2 billion, reflecting heavy AI infrastructure demand and growing adoption of Gemini-powered services.

These are not the numbers of a business getting disrupted. They reflect broad-based momentum. Management tied that momentum directly to AI features.

“AI Overviews drive meaningful query growth,” CEO Sundar Pichai said on the company’s third-quarter earnings call, noting that the effect strengthened during the quarter.

In parallel, Google Chief Business Officer Philipp Schindler said that, at today’s baseline, ads shown around AI Overviews are “monetized at approximately the same rate” as ads on its Google property that are not shown around AI Overviews, establishing a solid starting point as the company iterates.

Further, the company said AI Mode (an approach to online search that leans heavily on generative AI) usage is growing week over week in the U.S. Additionally, YouTube continues to benefit from recommendation quality improvements with the help of AI.

In short, AI features appear to be lifting engagement and enhancing overall monetization.