The Thesis Flipped in a Year
A year ago the headlines said AI would kill search and kill Google. The story now runs the other way: Google has the potential to win AI. The reason is the stack it controls end to end - models, chips, infrastructure, and distribution. All of it points toward a lucrative future in the AI race.
Alphabet remains a buy. The fundamentals are strong, everything is online, and while the stock has stepped back recently, the direction of travel favors the company. The stock is down about 2% in the session and sits at $358, off its all-time highs. That drawdown reflects real uncertainty about how much winning AI will cost.
Valuation and Forward Guidance
The valuation is reasonable, not cheap. The near-term uncertainty comes from a simple tension: winning this race is going to be very expensive, and the key question is how much Google will spend and whether it is trying to win AI at all costs. Forward guidance on future spend is what to watch on upcoming calls.
Two Engines: Search and Cloud
Search and cloud both matter and do different jobs. Search pays the way for the buildout - it has funded the infrastructure Google already owns. Cloud is where AI potentially cashes out. Nearly every company adopting AI rents it from someone else's cloud, which makes cloud the toll booth of the entire AI economy. Google's cloud grew 63% last quarter, with strong margin expansion and huge backlogs building quarter over quarter.
Competition is coming. A week or two ago Meta announced it is building its own compute business, so there is pressure. It is no cakewalk. But being a toll booth on the road to AI is a good position, and the cloud numbers keep improving.
Constrained Supply as a Bullish Signal
Google is rationing Gemini access because of capacity constraints. That can read as either a bullish sign or a red flag; the interpretation here is that it is the good kind of problem, though it carries real costs. Demand running ahead of supply beats a company sitting empty waiting for customers. Demand is so far ahead of schedule that the CEO said plainly on the last call that cloud revenue would be higher if they could meet it. To bridge the gap, Google started renting capacity from SpaceX. This is genuine demand, and it feeds back into the strength of the distribution and the stack.
Regulatory Risk Has Faded
The antitrust overhang is a chronic headwind rather than an acute threat, and the worst is behind them. The EU fine equals about two days of Google's net income. The case that actually mattered was the Department of Justice remedies trial, which Google substantially won: the judge preserved the Apple deal and rejected a breakup. More AI competition from OpenAI and Anthropic actually strengthens the argument for keeping Google together, and the sum of its parts is more valuable intact.
Capex Is the Variable That Decides Everything
This is not a fist-pounding, high-conviction, massive-position call, but Alphabet is an important company to hold given what AI will do to the future of markets. The move already happened once - the stock went from fear to fair value, and you only get that re-rating once. From here, returns have to come from earnings compounding, likely through a digestion year in 2027 as the heavy capex depreciates.
Capex is the single biggest variable in the stock and the thing to watch, more than a concern than a red flag. The spending is not speculative: Google has $460 billion of signed backlog waiting for that capacity. The open question is the cost of winning. There are stories that Google, wanting to dismantle competitors, could subsidize the cost of tokens and be the cheapest provider on the strength of its bankroll, scale, and capabilities. A stock price is the discounted future cash flow of a company, so massive spending ahead raises the question of what is left as net income for the investor. That remains to be determined.
Price Target and Expectations
Goldman Sachs cut its target by about $10 today to $440, against a stock at $358. Directionally that seems right; the low 400s are defensible, implying low to mid-teens annualized growth from here. Google has to get a lot right, and macro headwinds could interfere. Anyone expecting Google to repeat over the next 12 months what it did over the last 12 months is probably looking at the wrong stock.
