After a difficult stretch in which some investors worried it was falling behind in AI (artificial intelligence), Alphabet (GOOGL +0.26%) (GOOG +0.29%) has become one of 2025's standout winners. The parent of Google Search, YouTube, and a fast-growing cloud platform has seen its stock climb about 66% year to date as enthusiasm builds around its Gemini AI models and custom data center chips.
The rally has been accompanied by a clear reacceleration in its business. Alphabet just delivered its first quarter with more than $100 billion in revenue, powered by double-digit growth in search advertising, YouTube, subscriptions, and Google Cloud. Investors now appear far more convinced that Alphabet can not only survive an AI-centric world, but thrive in it.
The question for investors is whether that confidence has already pushed the stock high enough to fully price in the good news surrounding the company, or if shares are still undervalued.
Image source: Getty Images.
AI-driven business momentum
Alphabet's excellent third-quarter results help explain why investors love this tech company so much this year.
The online search giant's third-quarter revenue rose 16% year over year to $102.3 billion. While Google Services revenue increased 14% to $87.1 billion on the back of robust search and YouTube demand, the company's cloud computing business grew even faster. Third-quarter Google Cloud revenue climbed 34% year over year to $15.2 billion, and operating margin in the segment improved to 23.7% from 17.1% a year earlier as scale helped profitability. Management also highlighted a cloud backlog of about $155 billion, giving the company substantial contracted revenue to work through in the coming years.
Notably, Alphabet's revenue growth represents a step up from the company's performance in 2024, when full-year revenue increased 14% In other words, Alphabet is not just large and profitable; its top-line growth is picking up speed, even at the company's current scale.
A bet on AI
Management has been clear that AI is now central to its business. CEO Sundar Pichai said on the third-quarter call that the company's "full stack approach to AI is delivering strong momentum and we're shipping at a speed, including the global rollout of AI Overviews and AI Mode in Search in record time." He has also noted that Gemini models are processing billions of tokens per minute for customers, reflecting substantial adoption across developers and large enterprises.
That AI push, however, requires heavy investment. Alphabet management recently guided for 2025 capital expenditures of $91 billion to $93 billion, driven largely by spending on data centers, networking, and custom chips. While those numbers signal management's confidence in long-term AI demand, they also highlight a key risk: AI infrastructure isn't cheap -- and there's no guarantee the return on investment will pan out as well as expected.
NASDAQ: GOOGL
Key Data Points
Are shares overvalued now?
Given Alphabet's impressive growth and the improving profitability it is seeing in its cloud business, it is not surprising that the stock has rerated higher in 2025. Alphabet's shares are up 66% so far in 2025 as of this writing, outpacing the rest of the Magnificent Seven as investors reward its AI progress and renewed growth momentum.
With a price-to-earnings ratio of 31, the stock no longer appears to be the bargain it was before this year's surge. The valuation, for instance, doesn't leave much room for risks. For instance, if advertising budgets weaken or if AI-related costs remain elevated without leading to enough profit growth, earnings growth could not only slow but possibly even come to a screeching halt.
Sure, Alphabet's fundamentals look better than they did a few years ago, with faster revenue growth, a stronger cloud business, and AI products gaining real traction across search, YouTube, and enterprise workloads. At the same time, however, the stock price seems to be pricing this in.
Given that balance, Alphabet stock doesn't necessarily seem overvalued. But it's not a clear buy either. For that reason, I'd only recommend the stock for investors who want more exposure to AI. And even for these investors, it's probably wise to keep the position very small, waiting for a better entry point in the future before building a more meaningful position.
