When a stock surges 67% in a single year, conventional wisdom screams caution. After all, buying high rarely ends well -- or so the thinking goes. But Alphabet (GOOGL +1.53%) (GOOG +1.66%) may be one of those rare cases where the market is only now catching up to fundamental reality.
The company that many investors wrote off as an artificial intelligence (AI) laggard just a year ago has emerged as one of the technology industry's most formidable players in AI. The question now is whether shares can continue climbing after such a dramatic run.
Image source: Getty Images.
The AI monetization machine revs up
Alphabet's third-quarter results silenced skeptics who questioned whether the company could translate AI investments into actual revenue. Sales climbed 16% to $102 billion, while adjusted operating margins expanded to 34% -- proving that heavy AI spending isn't eroding profitability.
NASDAQ: GOOG
Key Data Points
Google Cloud represents the clearest evidence of AI monetization gaining traction. The segment grew 34% in the quarter, accelerating from the prior period, and now accounts for 15% of the company's total revenue. More importantly, the cloud backlog exploded 79% higher -- nearly doubling the 37% growth rate from the previous quarter. This surge in committed future revenue marks an inflection point in enterprise AI demand, which is expected to drive sustained growth through 2026 and beyond.
The Anthropic partnership announced in October adds another dimension to Alphabet's cloud opportunity. The multibillion-dollar deal brings one of AI's leading labs onto Google's Tensor Processing Unit (TPU) infrastructure, with more than 1 gigawatt of capacity expected to come online next year. This arrangement could generate $8 billion to $10 billion in annual revenue while validating Alphabet's proprietary AI chips as a genuine alternative to third-party processors.
Search proves more durable than feared
Perhaps no concern weighed more heavily on Alphabet shares than the existential threat posed by generative AI competitors to its search business. Yet Google Search continues to defy the disruption narrative, growing 12% in the second quarter and maintaining a dominant market share of over 80%.
AI Overviews and AI Mode -- features that embed generative AI directly into search results -- are driving incremental query growth rather than cannibalizing existing traffic. The 650 million monthly users on Gemini demonstrate that Alphabet can compete effectively in consumer AI applications. Rather than disrupting Google's core franchise, AI appears to be enhancing it by improving user engagement and expanding ad inventory.
The company's vertically integrated approach -- controlling everything from custom AI chips to consumer applications -- creates cost advantages that competitors relying on third-party hardware cannot match. A recent technical paper revealed that a median Gemini prompt consumes just 0.24 watt-hours of energy, comparable to traditional search and vastly more efficient than industry estimates suggested.
The valuation reality check
At 25 times projected 2027 earnings, Alphabet trades at a premium to the broader market, but at a discount to many of its technology peers. This multiple reflects reasonable expectations for a company projecting 13% annual revenue growth over the next five years, with cloud sales potentially growing at a rate more than twice that.
The balance sheet provides additional comfort. With $98 billion in cash against $22 billion in debt, Alphabet maintains extraordinary financial flexibility. The company has reduced shares outstanding by 9% over the past five years through buybacks, while initiating a quarterly dividend earlier this year.
The opportunity in plain sight
Alphabet's resurgence reflects a market finally recognizing what patient investors understood all along: Google's AI capabilities were underestimated, its search franchise remains more durable than feared, and its cloud business is reaching an inflection point. The company isn't playing catch-up in AI; it's demonstrating leadership across hardware, cloud infrastructure, and consumer applications.
For investors willing to look past a strong year, Alphabet offers exposure to the AI infrastructure buildout, resilient advertising cash flows, and optionality on emerging businesses like Waymo. The easy gains may be behind us, but the fundamental story remains strong.
Sometimes, the obvious opportunity hiding in plain sight turns out to be exactly what it appears to be.
