Alphabet (GOOG 0.56%) (GOOGL 0.59%) has a valuable ecosystem of services across Google Search, YouTube, and Gmail. More than 2 billion people use these services every day, but artificial intelligence (AI) is introducing a threat the company hasn't faced before.
OpenAI's ChatGPT has more than 700 million weekly users, compared to 450 million monthly users for Google's Gemini. This is creating new competition for Google's dominant search business. But one reason Alphabet can defend its position and deliver returns for investors is the substantial investments it has made in technology infrastructure.
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Google's largest business is showing solid growth
Alphabet is slated to report its third-quarter earnings results on Oct. 29, but its second-quarter report in July showed solid growth across the business. Alphabet generates 74% of revenue from advertising, with the largest component of this coming from search. If Alphabet's competitive position is weakening, it will show in search revenue, but this business is holding up well. Search and other services reported revenue growth of 12% year over year in Q2, driven by strong engagement with AI Overviews.
"AI is positively impacting every part of the business, driving strong momentum," CEO Sundar Pichai said. Pichai also noted that YouTube and subscription offerings delivered strong performance, which shows that the company's entire ecosystem is benefiting from investments in AI.
Google also has promising moonshot opportunities in self-driving cars with Waymo and quantum computing, which provide some optionality that is not priced in to the share price. This is all possible because of the company's investments from growing operating cash flows in AI infrastructure.
NASDAQ: GOOGL
Key Data Points
Alphabet's competitive advantage
Data center capacity is the most valuable asset in the AI race. This puts Google way ahead of the game. It has cloud computing (Google Cloud), proprietary AI models (Gemini), custom AI chips (Tensor Processing Units), and data centers. These assets are undervalued by investors right now.
Alphabet generated $133 billion in cash flow from operations over the last year through Q2 2025. This cash flow will fund approximately $85 billion in capital expenditures this year, which is funding servers and an acceleration in data center construction.
The recent strength in its advertising businesses and growing cash flows show Alphabet is well positioned to deliver excellent returns for investors. The stock's valuation appears to be in the process of being rerated. It has rocketed 65% in the last six months, outperforming the S&P 500, yet the stock still trades at just 24 times 2026 earnings projections. This valuation on top of strong growth makes it a solid buy.
