Alphabet (NAS: GOOGL) reported strong fourth-quarter earnings, with sales up 18% to $113 billion and adjusted operating margins down 50 basis points to 31.6%. Google Cloud continues to be the star of the show, accelerating both sequentially and year over year to 48% growth.

Why it matters: Long gone are the days when the market had written off Alphabet as an artificial intelligence laggard. The massive surge in Alphabet shares has closely mirrored a turning tide, with investors now viewing the firm as an AI winner, with AI driving sales across the firm’s many segments.

  • The most obvious beneficiary of AI within Alphabet remains its cloud business, which now constitutes 16% of the firm’s total top line. The launch of Gemini 3, Alphabet’s latest large language model, continued to expand the firm’s enterprise and consumer market share.
  • We are impressed at how Alphabet continues to integrate AI within Google Search. By adding features such as AI Overviews and AI Mode, the firm has not only mitigated a real competitive threat from GenAI chatbots but also increased the number of queries and the ad price per query.

The bottom line: We maintain our $340 fair value estimate for wide-moat Alphabet and continue to view the firm as a clear leader in AI. Shares traded slightly down after hours, and we view them as fairly valued.

  • We continue to applaud Alphabet’s full-stack AI strategy, which enables the firm to be the master of its own destiny. Unlike peers that rely on external AI labs and AI chips, Alphabet’s investments in Google DeepMind and TPUs appear increasingly prescient over time.

Big picture: While results remain upbeat, it is important to step back and remain cognizant of the costs associated with AI. Management guided to approximately $180 billion in capital expenditures in 2026, a 97% year-over-year increase, and 38% of our sales forecast for the year.

Coming up: We expect a broader rollout of ads within AI Search in 2026, which should add incremental Google Search sales.

Alphabet is a behemoth with its fingers in many profitable pies

We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has built itself into a true behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals, including search, artificial intelligence, video, and cloud computing.

Alphabet’s core strategy is to preserve its strong advertising business, with the majority of advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.

We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. We believe that by leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.

On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.

Beyond search, we have a positive outlook on Alphabet’s cloud computing platform, Google Cloud Platform. We believe increased migration of workloads to the public cloud and an uptick in the deployment and usage of AI are key growth drivers for GCP over the next five years. At the same time, we believe that as GCP scales, it will become a more important part of Alphabet’s overall business, both from a top-line and profitability perspective.

Bulls say

  • Alphabet’s core advertising business is deeply entrenched in advertising budgets, allowing the firm to benefit from a secular increase in digital advertising spending
  • The firm’s advertising business generates substantial cash flows that it can reinvest in growth areas such as GCP, AI-infused search, and aspirational projects such as Waymo.
  • Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.

Bears say

  • While Alphabet is seeking to diversify its business away from search, text-based advertising remains the largest contributor to the firm’s top line, creating a concentration risk.
  • Alphabet’s continued investments in new, often unproven technologies have been a drag on cash flows.
  • Regulators around the world are keying in on Alphabet’s search dominance and could upend the search market through the imposition of deep, structural changes in the space.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.