Investors looking for a top stock idea with long-term exposure to AI (artificial intelligence) often start with the chipmakers. But the bigger opportunity may flow to the platforms that already sit on top of the internet's most valuable attention and data.
That's why Alphabet (GOOGL 1.70%) (GOOG 1.60%) deserves a closer look today. The tech company is still best known for Google Search, YouTube, and its broader digital advertising franchise. Yet the more important shift for investors may be Google Cloud -- and how quickly the cloud computing segment can turn AI cloud computing demand into durable, profitable growth.
Alphabet's third-quarter results showed that this shift is underway. The company's total revenue in the period rose 16% year over year to $102.3 billion. But Google Cloud revenue jumped 34% to $15.2 billion, and the segment's operating income surged 85% to $3.6 billion. Additionally, Alphabet's cloud backlog climbed 46% year over year to $155 billion, reflecting multi-year commitments as customers reserve capacity for AI workloads.
Google Cloud is no longer just a fast-growing segment inside a bigger advertising company. It's becoming a profit contributor that can meaningfully influence Alphabet's overall growth profile.
Image source: Getty Images.
A cloud business that matters
Google Cloud's momentum is important for several reasons
First, it gives Alphabet a clearer second pillar of growth. Advertising will likely remain the company's biggest profit driver for a long time. But ad spending is cyclical, and competition for marketing dollars is constant. Cloud computing demand, by contrast, is being fueled by enterprises modernizing their information technology (IT) stacks and building generative AI applications -- to powerful secular trends that seem like they have plenty of runway left.
Second, Alphabet's cloud computing business is growing faster than its overall business. This means that as Google Cloud grows as a percent of overall revenue, it can more easily influence the company's overall growth rate, essentially improving and extending Alphabet's growth story.
Third, the segment is already demonstrating operating leverage. Google Cloud's operating margin in Q3 was 23.7%, up from 17.1% in the year-ago quarter. This means that the segment has the potential to become a major driver of earnings over the long haul.
Alphabet is also building out cloud capabilities beyond raw compute. Earlier this year, the company disclosed that it entered an agreement to acquire Wiz, a cloud security platform, in an all-cash deal expected to close in 2026, subject to regulatory approvals. If that deal closes, it would strengthen Alphabet's cloud security offering at a time when enterprise customers are putting more sensitive workloads into the cloud.
Finally, Google Cloud is powering AI features across Alphabet's existing products and services, delivering enhanced experiences for users. The company has been integrating AI into every corner of its business, including Google Search and YouTube.
Big spending raises the bar
Alphabet's cloud story is real, but it isn't risk-free.
The biggest issue right now is the investment burden required to compete in AI infrastructure. Alphabet said its capital expenditures were $24 billion in Q3. And it now expects full-year 2025 capital expenditures of $91 billion to $93 billion. That is an enormous commitment. It might prove wise, but it also raises the bar for what the business needs to deliver in return.
NASDAQ: GOOGL
Key Data Points
Valuation matters, too. Alphabet isn't priced like a bargain. Shares trade at around 30 times earnings. Sure, for a company of Alphabet's quality, that multiple may not be outrageous. But it certainly prices a continuation of the sort of growth rates Alphabet is already delivering -- particularly in Google Cloud. If this important catalyst becomes less exciting over time, the stock's valuation multiple could come down.
Meanwhile, competition remains intense. Microsoft and Amazon, for instance, are both investing aggressively in cloud infrastructure and AI services. With the pace of AI innovation moving so fast, Alphabet needs to keep improving its AI offerings and continue winning large cloud deals. Additionally, it needs to do this while protecting its growing its advertising cash flows.
Ultimately, however, I believe that Alphabet's diversified business is worth paying up for -- especially when considering the momentum the company has in cloud. Still, in light of some of the risks Alphabet faces, I'd keep any position in the stock modest.
