Alphabet’s 160% rally in a year shows the value of owning a bunch of AI stacks

Alphabets it passed briefly Nvidia according to the market average in after-hours trading this week, a remarkable move for a company that was seen as deeply vulnerable in the early days of artificial intelligence development.

The stock has soared nearly 160% in the past year, driven higher by the view from Wall Street that Google is well-positioned in the AI ​​universe, whether it comes from the company’s home models, its massive distribution network or its cloud unit that is struggling to cash in from other booming AI businesses.

Among the seven billion dollar tech companies in the US, the chip designer Broadcom is the next best performer over the past 12 months, with its stock up 107%.

“Google is one of the most well-positioned AI companies because they’re the majority shareholder,” said Gene Munster, managing partner at Deepwater Asset Management. “The chips, the models, the infrastructure and the distribution. In addition, they have a good profit.”

Another company he put in that category is Elon Musk’s SpaceX, which merged with xAI in February in a deal worth $1.75 trillion.

Following Alphabet’s earnings report last week, JPMorgan analysts called the stock their “top pick” in the technology sector, pointing to an “outstanding quarter,” accelerating growth and a cloud backlog that nearly doubled to $462 billion. Mizuho analysts raised their price target, writing that consensus estimates still significantly underestimate Google Cloud’s revenue and operating income over the next two years.

Alphabet closed the week with a market cap of $4.8 trillion, behind only Nvidia at $5.2 trillion. The pair rallied briefly after markets closed on Tuesday following a report that AI model developer Anthropic had committed to spending $200 billion on Google Cloud over five years for 5 gigawatts of computing.

For investors, it was the latest sign that Google has more ways to make money and ultimately compete. There are Gemini and DeepMind for AI models and research, Google Cloud for computing, tensor processing units (TPUs) as an alternative to Nvidia, and the ability to add AI features to search, YouTube and Android.

There are reasons to be skeptical, however, in the eyes of some analysts.

A key concern is how much of a backlog could come from Anthropic, a cash-rich start-up that’s raising tens of billions of dollars for Google, and, using much of that money through Google on cloud services and TPUs.

If Anthropic’s $200 billion commitment is measured against Alphabet’s cloud backlog, it would represent more than 40% of future contract revenue.

Gil Luria, an analyst at DA Davidson, said that this arrangement reminds us of what happened in it The Oraclewhich saw its stock rise in September after the company reported a nearly 360% increase. It soon became clear that much of that was coming from OpenAI.

“They did it the same way as Oracle,” said Luria, who recommends holding Alphabet shares. “They told us their backlog doubled without telling us that almost all of this money came from one deal with Anthropic.”

Google did not provide comment for this story, pointing only to CFO Anat Ashkenazi’s comments on the last earnings call.

Oracle was punished after investors saw much of its lagging growth linked to OpenAI, and the stock has lost nearly half its value in five months. Microsoft faced similar questions about its OpenAI exposure.

Luria sees the risk of concentrating on all major cloud providers. Microsoft, Oracle, Amazon and Google collectively have close to $2 trillion in reported cloud backlog. About half of that, Luria said, goes back to commitments from OpenAI and Anthropic, both of which are tapping that group of companies for funding.

Munster understands the concern but doesn’t share it, at least as far as Google and Anthropic are concerned.

“The deal underscores how fast we are in AI,” Munster said. “Although the use cases are limited today, the demand for computing is huge. Google will ride that wave.”

If Anthropic falters, Munster says, other AI companies will eventually replace it.

“Headlines about the size and risk of any customer miss the point,” he said. “If one of those customers explodes, over time there will be a bunch to take its place.”

Where Google has a clear and emerging advantage is in custom silicon.

Mizuho estimates that about $61 billion of Google’s cloud backlog through 2027 could come from sales of its TPUs, and most of that revenue will likely be seen next year. That gives investors looking for an alternative to Nvidia another way to buy the AI ​​hardware trade, a theme that has swept Wall Street lately, for shares Advanced Micro Devices, Intel again Micron all more than doubled this year.

One of the requirements for Google and Amazon, which makes Trainium, is to see their internal chips come from their portfolio companies, according to Luria.

“When Google and Amazon talk about the demand for their proprietary chips, a lot of that is captive demand,” Luria said. “It’s not a living thing.”

For Munster, the biggest threat to Google’s outperformance is that the stock is already baking for future gains. He likens that situation to what is happening now with Nvidia, which continues to grow exponentially but is no longer rewarded by investors.

Analysts expect to see 78% revenue growth when Nvidia reports earnings later this month, according to LSEG, but the stock is up only 15% this year, slightly outpacing the Nasdaq.

“The biggest risk of owning Google is that they don’t have the opportunity to change the narrative for investors,” Munster said.

That increases the weight on the company to impress at Google I/O, which starts in less than two weeks. Google needs to provide clarity on its agent strategy with Gemini and demonstrate that it can generate sustainable revenue from the broader AI ecosystem.

Google has gone from AI laggard to infrastructure winner in no time. It now projects capital expenditures of up to $190 billion this year, more than doubling its 2025 capex. For investors to get a return on that investment, Google can’t afford to be smooth.

Argus analysts said in a post-earnings report that “Alphabet’s investment risks are significant.” But they have a buy rating on the stock and view the company’s ability to recover those costs against the likes of OpenAI as a “competitive advantage.”

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