Equity Research
Rating: BUY | 12-M Price Target: $430 | Upside: +25% | Current Price: $344
The Big Picture
Alphabet is Google’s parent company. We think it’s a Buy and set a price target of $430, which is 25% above current levels.
Alphabet has two major growth drivers today. The first is Google Search. Many thought that Search would be decimated by AI chatbots such as ChatGPT. This has yet to materialize and Search + YouTube advertising revenue is growing at healthy double digit rates. The second growth driver is Alphabet’s Google Cloud business. Cloud computing is growing rapidly (82% year over year in the trailing quarter) as businesses need to run their AI models somewhere.
The concern is that Alphabet is spending billions on AI data centers and chips. In fact, the buildout is so large that Alphabet’s free cash flow (the cash a company has left over after expenses) dipped into negative territory for the first time in many years. We believe the long term growth prospects more than justify short term pain from spending, which is why we rate the stock a Buy.
Why we believe it: We think the market is understating Google’s cloud growth and the future bookings (businesses it has already promised to deliver) Google Cloud has waiting in the wings. We are less certain about how long spending will remain elevated before it tapers off and cash flow recovers.
How Alphabet Actually Makes Money
Alphabet has five core segments within its business. Here’s how to think about them:
Google Search and other: This encompasses Google Search (the box most people start typing into when they go to google.com), Google Assistant, Google Shopping, etc. Other companies pay Google to display ads in conjunction with search results. This brought in $63.3 billion in revenue last quarter, up 16.9% year-over-year.
YouTube ads: Ads that run on YouTube videos. YouTube generated $11.1 billion last quarter, up 13%.
Google Network: Advertising revenue earned from placing ads on other companies’ websites and apps (through services such as AdSense). Revenue was roughly flat at $7.3 billion.
Subscription, Platforms and Devices: This includes revenue from YouTube Premium and YouTube Music subscriptions, Google One cloud storage, Pixel phones, and the Google Play store. Revenue of $12.9 billion was up 15%.
Google Cloud: Through Google Cloud, Alphabet rents computing power, storage, and software (Google Workspace, its Gemini AI models) to other businesses. Cloud is by far Alphabet’s fastest-growing business: Revenue of $24.8 billion was up 82% from the prior year.
Other Bets: These are Alphabet’s embryonic ventures that are still getting started. The most notable of these is Waymo, its self-driving-car subsidiary. Revenue for this segment reached nearly $500 million last quarter, up from $166 million a year ago. Note that despite this sizable jump in revenue, Other Bets still loses money.
Keeping them all going is Alphabet’s artificial intelligence platform: Its suite of Gemini AI models, custom-made computer chips called TPUs that power those AI models (instead of, say, chips from Nvidia), and its entire AI research organization, Google DeepMind. AI permeates Alphabet’s business at just about every level, helping power smarter search functionality on one end of the spectrum all the way to Cloud customers’ AI initiatives.
Our take: We see Google Cloud’s steadily increasing share of revenue as a positive long-term sign. Historically, Cloud has tended to become more profitable as it scales up, similar to how Search did years ago.
How the Business Has Been Performing
Revenue has increased every quarter for the past five quarters, hitting $119.8 billion in the latest quarter (up 24% year over year). Alphabet has also become more profitable, with operating margin (profit/revenue before certain expenses) hovering around 34%.
First, you'll notice how Google Cloud's profit margin has more than doubled in just over a year, increasing from roughly 21% to roughly 36%. That indicates the business segment is reaching maturity. Secondly, you'll notice how free cash flow was negative for the quarter. Despite generating $45 billion in cash from its operations, the company invested $44.9 billion in building new data centers and purchasing chips.
Important note: Net income has jumped to unusually high levels the past two quarters, far more than would be suggested by day-to-day business activity. It's extremely likely the result of one time gains from increased value of Alphabet's investment in other companies, rather than underlying business operations doubling in profitability. We wouldn't bank on net profit remaining at this elevated level in the future, and you should probably read Alphabet's filings to confirm what drove the increase.
Our view: we like what we see with Alphabet. Revenue is consistently growing, profit margins are improving across their main business segments, and Google Cloud continues to gain ground. However, we don't want to give too strong of reading into the recent jump in profits since we believe it is likely due to peculiar items on the company's income statement rather than sustainable business improvements.
What Could Drive Growth From Here
AI inside Search. Google's latest AI model, Gemini 3, is currently inside features called "AI Overviews" (AI generated summaries displayed at the top of a Google search) and "AI Mode" (a search experience more akin to chatting). Both features are live for over 1 billion and 2 billion monthly active users respectively. Ads are starting to show up inside AI answers, which could be another sign that Google is figuring out how to monetize search as AI takes up an increasing role.
Google Cloud growing fast. Growth for Google Cloud was 82% last quarter, far outpacing Google's two largest rivals, Amazon Web Services and Microsoft Azure. More importantly, Alphabet's total backlog of signed cloud sales contracts that have yet to be delivered grew to roughly $514 billion, up from about $108 billion the year prior. Google Cloud backlog is revenue Google knows it will get in the future, it's just not billed yet.
Building their own AI chips (TPUs). Google doesn't have to rely on Nvidia for AI chips, because it makes its own. These are called TPUs and the newest versions are nicknamed Trillium and Ironwood. Google likely saves millions, if not billions of dollars a year by building its own AI chips instead of buying them from Nvidia. It also has a unique selling point it can offer to cloud customers who don't want to solely rely on Nvidia technology.
YouTube/streaming. YouTube is responsible for almost as much time spent watching TV in the US as actual cable TV is. It's crushing them in the younger demographics and competing directly with TikTok type video apps.
Waymo/self driving car business. Waymo now offers rides where you don't need to pay a driver in roughly 10-11 US cities, and recently won approval to expand throughout a much larger region of California. They want to get to over 1 million paid rides per week by the end of 2026. While it still won't be huge until further out, Waymo seems to have solved most of the technological problems and could become a nice profit generator down the road.
Other companies to watch. OpenAI (company behind ChatGPT) is currently valued at $852 billion after raising $122 billion in investor money. Anthropic, a business partly funded by Google's own employees, is valued at $380 billion. Both of these companies are developing AI products that could one day directly compete with Google Search and Google Cloud. AWS and Microsoft are always going to be Google's biggest competitors in cloud, while Meta and TikTok will do their best to capture as many of your attention minutes and ad dollars away from Google.
our view: Cloud and Waymo are the two businesses we see the most risk/reward in because you can easily see their growth happening right now, both in the financials and in actual cities these services are expanding to. With Google's custom chips, we don't really know how much of a cost advantage it provides Google, we just know it exists.
How Alphabet Spends Its Money
Alphabet creates tons of cash from operations, but is currently investing most of it in AI infrastructure. The company doubled its spending guidance twice in 2026, and now expects to spend $195-$205 billion on infrastructure this year alone. That's more than double its spend in 2025, and on top of $811 billion of future spend it has already committed to (think chips, cloud capacity, etc. ).
Due to this expenditure, Alphabet briefly suspended share buybacks during the first half of 2026 (they had been occurring regularly prior to this), though continued to pay its usual dividend. Alphabet has a very strong balance sheet with >$240 billion in cash and short term investments and very little debt.
CEO Sundar Pichai and CFO Anat Ashkenazi. For now, investing in AI infrastructure is clearly their priority over buybacks/acquisitions.
Our view: We aren't concerned by the suspension of buybacks. It seems like a strategic decision to invest in AI while the growth opportunity is still so large, and we would expect them to resume buybacks when this spending normalizes.
How Alphabet Compares to Other Big Tech Companies
What Investors and Analysts Are Saying
Wall Street analysts are extremely bullish on Alphabet. Currently, 15 out of 18 analysts say Buy while 0 say Sell. The average analyst price target is roughly $426, compared to our $430 price target.
Institutional investors such as Blackrock, Vanguard, and Fidelity have built large positions in the stock and continue to grow them. Also keep in mind that Google founders Larry Page and Sergey Brin own special shares with expanded voting rights. While Alphabet CEO Sundar Pichai runs the company on a daily basis, Google's founders still have significant control over the company.
Our take: It's a good sign that almost all analysts think you should buy the stock, but with that kind of agreement expect there to be high expectations as well. Good news will likely be priced in but any disappointment will likely lead to larger than normal drops in the stock price.
conclusion
Our Buy rating and $430 price target imply ~25% upside from current levels. The elevated valuation is manageable for investors that are willing to hold for longer timeframes of a year or more and who are not worried about near-term volatility surrounding hefty AI investments. Everyday investors can add Alphabet to their portfolio as a rock solid core tech holding. For institutional investors looking to ride the AI/self driving car wave, Alphabet stocks offer a much safer alternative to putting money directly into immature, unprofitable AI startups.
Moving forward we would pay close attention to how quickly FCF rebounds once the investment spending tails off, as well as any developments with regulatory appeals in the coming years.