Heading into 2025, I predicted that the best performer among the so-called "Magnificent Seven" stocks for the year would be Alphabet (GOOGL 2.43%) (GOOG 2.48%). That proved to be the correct call, as the stock climbed more than 65%, finishing well ahead of second-place performer Nvidia (NVDA 4.38%), which gained nearly 39%.
The biggest reason behind Alphabet's outperformance in 2025 was that it was able to change investors' perceptions about the impact of artificial intelligence (AI) on its business. The company's Gemini model gained widespread praise as being a top large language model (LLM), and investors began realizing the importance of its tensor processing units (TPUs), which are the custom chips it uses to train its model and run AI inference.
NASDAQ: GOOGL
Key Data Points
With the help of AI Overviews and AI-powered features like Lens and Circle to Search, the company began to see its Google search revenue accelerate. It then caught a break, when the judge in its antitrust trial ruled it could not only keep its Chrome browser and Android smartphone operating system, but that it could also still make deals to be the default search engine of Apple devices. This removed an overhang and let the company keep its huge distribution advantage, which ensures that Google remains the gateway to the internet for most people.
As the year wore on, investors also began to take notice of the importance of Alphabet's TPUs. The company had developed the custom chips more than a decade ago, and they have been tightly integrated into its system, giving it a big head start in the custom AI chip space. By having top-notch custom AI chips, Alphabet doesn't have to pay the so-called Nvidia tax, giving it a big structural cost advantage both with LLM training and inference.
Image source: Getty Images.
Its chips have become so highly regarded that customers have begun to use its TPUs through its cloud computing offering to run their own AI workloads. Google Cloud was a big revenue driver for the company in 2025, and customers deploying TPUs through Google Cloud could be a catalyst moving forward. Anthropic recently placed a $21 billion TPU order through Alphabet partner Broadcom, and Morgan Stanley analysts predict that customers could deploy around 5 billion TPUs in 2027. It estimates that for every 500,000 TPUs deployed, it boosts Alphabet's revenue by about $13 billion.
After a strong stock performance in 2025, Alphabet looks well positioned in 2026, as many of its growth opportunities are still ahead. Look for the stock to outperform the market once again this year.
