Alphabet's 160% rally in a year reflects value of owning 'most of the stack' in AI

Alphabet's remarkable ascent in the stock market reached new heights this week, as the company's market capitalization briefly surpassed that of Nvidia during after-hours trading. This surge is particularly noteworthy for a firm that was once perceived as vulnerable in the early stages of the artificial intelligence revolution. Over the past year, Alphabet's stock has skyrocketed approximately 160%, fueled by a growing consensus on Wall Street that the company has strategically positioned itself at the forefront of the AI sector. Whether through its proprietary AI models, expansive distribution channels, or lucrative cloud services, Google is seen as a formidable player. Among the other tech giants in the U.S. valued at over a trillion dollars, Broadcom has emerged as the next strongest performer, with its shares climbing 107% in the same period. Gene Munster, managing partner at Deepwater Asset Management, commented, "Google is one of the two best-positioned AI companies because they control most of the stack—chips, models, infrastructure, and distribution. Plus, they're quite profitable." He also highlighted Elon Musk's SpaceX, which recently merged with xAI in a deal valued at an impressive $1.75 trillion, as another key competitor. Following Alphabet's latest earnings report, analysts at JPMorgan declared the stock their "top overall pick" in the tech sector, citing a standout quarter, accelerating growth, and a cloud services backlog that nearly doubled to $462 billion. Mizuho analysts have also raised their price target, indicating that current consensus estimates likely underestimate Google Cloud's revenue and operating income for the next two years. As of now, Alphabet's market capitalization stands at $4.8 trillion, just behind Nvidia's $5.2 trillion. The two companies momentarily exchanged places in market value following news that AI model developer Anthropic committed to spending $200 billion on Google Cloud over the next five years for 5 gigawatts of computing power. This development is seen as a clear signal that Google possesses multiple avenues for revenue generation and maintains a competitive edge. However, some analysts express caution. One major concern is the extent to which Anthropic's spending might inflate Alphabet's reported cloud backlog. The projected $200 billion investment could account for more than 40% of Alphabet's future contracted revenue. Gil Luria from D.A. Davidson noted that this situation mirrors what occurred at Oracle, which saw its stock surge before investors realized that a significant portion of its backlog increase was tied to OpenAI. "They announced a backlog increase without clarifying that a substantial part stemmed from a single deal with Anthropic," Luria stated, while recommending that investors hold onto their Alphabet shares. Google did not respond to requests for comments but pointed to CFO Anat Ashkenazi's remarks from the last earnings call. The aftermath of Oracle's experience serves as a cautionary tale; its stock plummeted after investors recognized that a large part of its backlog was dependent on OpenAI's commitments. Microsoft has faced similar scrutiny regarding its ties to OpenAI. Luria highlighted the concentration risk present among major cloud service providers, with Microsoft, Oracle, Amazon, and Google collectively reporting nearly $2 trillion in cloud backlog, much of it tied back to commitments from OpenAI and Anthropic. Despite these concerns, Munster remains optimistic about Google's prospects. "The deal highlights how nascent the AI market still is," he explained. "Although current applications are limited, the demand for computing power is burgeoning. Google is poised to capitalize on that growth. If Anthropic encounters difficulties, other AI firms will emerge to fill the void." Google's competitive advantage also lies in its custom silicon offerings. Mizuho estimates that approximately $61 billion of Google's cloud backlog through 2027 could result from sales of tensor processing units (TPUs), with most revenue expected to be recognized next year. This positions Alphabet as an attractive alternative to Nvidia for investors seeking involvement in the AI hardware sector, a trend that has seen stocks of Advanced Micro Devices, Intel, and Micron more than double this year. While some of the demand for in-house chips from Google and Amazon stems from their portfolio companies, Luria pointed out that much of it may not be organic. For Munster, the primary challenge for Google lies in the potential for its stock to already reflect future growth, similar to the current situation with Nvidia, which, despite substantial growth, has seen its stock appreciation stall. As Google prepares for its upcoming I/O event, the company faces increased pressure to clarify its strategy for AI and demonstrate its ability to generate sustainable revenue from the wider AI ecosystem. Recently, Alphabet has shifted from being perceived as an AI laggard to becoming a key player in AI infrastructure. With projected capital expenditures reaching up to $190 billion this year—more than double its capex for 2025—Google is under pressure to deliver results that satisfy investors. Analysts at Argus have noted the risks associated with Alphabet's spending but maintain a buy rating on the stock, viewing its financial strength as a competitive edge over startups like OpenAI.