Alphabet’s 160% Rally: The Value of Owning the AI Stack

Alphabet, the parent company of Google, briefly surpassed Nvidia in market capitalization in after-hours trading this week. This significant milestone for a company that initially faced skepticism in the burgeoning artificial intelligence landscape underscores its robust strategic positioning.

The surge in Alphabet’s stock, which has climbed approximately 160% over the past year, is attributed to a growing conviction on Wall Street that the tech giant is exceptionally well-positioned across the AI value chain. This advantage stems from its internally developed AI models, its expansive distribution network, and its highly profitable Google Cloud unit, which is generating substantial revenue from other rapidly growing AI ventures.

Among the U.S.’s seven other trillion-dollar tech behemoths, chip designer Broadcom stands out as the next best performer over the last twelve months, with its stock appreciating by 107%.

“Alphabet is one of the two best-positioned AI companies because they own most of the stack,” stated Gene Munster, managing partner at Deepwater Asset Management. “This includes everything from chips, models, and infrastructure to distribution. Crucially, they are also demonstrating strong profitability.”

Munster identified Elon Musk’s SpaceX, which merged with xAI in February in a deal valued at $1.75 trillion, as the other company in this elite category.

Following Alphabet’s recent earnings report, analysts at JPMorgan highlighted the stock as their “top overall pick” within the technology sector. They pointed to a “standout quarter,” accelerating growth, and a cloud backlog that nearly doubled to $462 billion. Mizuho analysts also raised their price targets, suggesting that current consensus estimates significantly underestimate Google Cloud’s revenue and operating income projections for the next two years.

Alphabet concluded the week with a market capitalization of $4.8 trillion, trailing only Nvidia at $5.2 trillion. The two companies briefly swapped positions after Tuesday’s market close, following a report indicating that AI model developer Anthropic committed to spending $200 billion on Google Cloud over five years for 5 gigawatts of compute power.

For investors, this development signifies that Google possesses a multifaceted strategy to monetize its AI endeavors and maintain a competitive edge. Its AI capabilities span from its Gemini and DeepMind AI models and research, to Google Cloud for compute resources, its Tensor Processing Units (TPUs) as an alternative to Nvidia’s offerings, and the seamless integration of AI features across its core products like Search, YouTube, and Android.

However, some analysts express caution. A primary concern revolves around the composition of Alphabet’s significant cloud backlog, particularly the extent to which it is influenced by Anthropic. This AI startup, known for its substantial cash burn and high valuation, is receiving substantial funding from Google, a portion of which is reinvested into Google’s cloud services and TPUs.

If the reported $200 billion Anthropic commitment is considered against Alphabet’s reported cloud backlog, it could represent over 40% of its future contracted revenue, a significant concentration from a single customer.

Gil Luria, an analyst at D.A. Davidson, draws a parallel between Alphabet’s current situation and the trajectory of Oracle. Oracle experienced a substantial stock surge in September following a reported nearly 360% increase in its backlog, a growth largely attributable to a single major deal with OpenAI.

“They’ve executed their strategy in a manner similar to Oracle,” Luria commented, while maintaining a “hold” recommendation on Alphabet shares. “They informed us that their backlog had roughly doubled without disclosing that nearly the entire increase stemmed from a singular deal with Anthropic.”

Alphabet did not provide an official comment for this story, directing inquiries to CFO Anat Ashkenazi’s remarks on the latest earnings call.

Oracle faced investor scrutiny after it became apparent that a significant portion of its backlog growth was tied to OpenAI, leading to a roughly 50% decline in its stock value over five months. Microsoft has encountered similar questions regarding its exposure to OpenAI.

Luria identifies concentration risk across the major cloud providers. He estimates that nearly half of the combined cloud backlog of approximately $2 trillion reported by Microsoft, Amazon, and Google, can be traced back to commitments from OpenAI and Anthropic, both of which are actively seeking capital from these same tech giants.

While acknowledging these concerns, Munster remains optimistic about Google and its relationship with Anthropic.

“The deal highlights how early we are in the AI revolution,” Munster observed. “Even with current limited use cases, the demand for compute power is growing exponentially. Google is poised to capitalize on this trend.”

He further suggests that should Anthropic falter, other AI companies will eventually emerge to fill the void.

“The focus on the size and risk associated with any single customer misses the broader picture,” Munster asserted. “If one of these key clients experiences difficulties, numerous others will step in to take their place over time.”

Alphabet’s clear and growing advantage lies in its custom silicon development.

Mizuho estimates that approximately $61 billion of Google’s cloud backlog through 2027 could be attributed to sales of its TPUs, with the majority of this revenue projected to be recognized in the upcoming year. This presents investors seeking alternatives to Nvidia with another avenue to participate in the AI hardware market. This theme has captivated Wall Street recently, with shares of Advanced Micro Devices, Intel, and Micron all more than doubling this year.

According to Luria, some of the demand that Google and Amazon (which manufactures Trainium) are experiencing for their proprietary chips comes from their own portfolio companies.

“When Google and Amazon tout the demand for their custom silicon, a substantial portion of that is internal, captive demand,” Luria explained. “It’s not truly organic.”

For Munster, the primary threat to Alphabet’s sustained market outperformance is the possibility that current stock valuations are already pricing in future growth. He draws a parallel to Nvidia’s current situation, where despite continued substantial growth, investor rewards have diminished.

Analysts anticipate 78% revenue growth for Nvidia when it reports earnings later this month, according to LSEG. However, the stock has only seen a 15% increase this year, slightly outperforming the Nasdaq.

“The most significant risk for investors holding Alphabet stock is the potential lack of opportunities to fundamentally shift the narrative with investors,” Munster concluded.

This situation places increased importance on the company to deliver a compelling performance at Google I/O, the upcoming developer conference. Alphabet needs to provide clear insights into its AI agent strategy powered by Gemini and demonstrate its ability to generate sustainable revenue streams from the broader AI ecosystem.

Alphabet has rapidly transitioned from an AI laggard to a dominant infrastructure provider. The company has projected capital expenditures of up to $190 billion for the current year, more than double its capital spending in 2025. To achieve a return on this significant investment, Alphabet cannot afford any missteps.

In a report released after its earnings, analysts at Argus acknowledged that “risks associated with Alphabet’s capex spend are salient.” Nevertheless, they maintain a “buy” rating on the stock, viewing the company’s financial capacity to support these expenditures, especially when compared to entities like OpenAI, as a distinct “competitive advantage.”