Google Cloud's growth will justify its major spending.
Google Cloud's growth will justify its major spending.
An important event is coming up for Alphabet (GOOG -1.68%) (GOOGL -1.74%) investors: its third-quarter earnings. I think it has a great setup heading into its earnings report, and it could all combine to send the stock soaring following the announcement.
There are few stocks better positioned to thrive in the AI arms race than Alphabet, and with the stock down over 10% from its all-time high, now is the perfect time to buy.
Alphabet's big spending will be in focus
AI is affecting Alphabet in multiple ways. Alphabet's biggest revenue stream comes from advertising on its Google family of products, and as it has heavily integrated AI into these products, its business has shifted slightly. Last quarter, Google Search revenue rose 17% year over year, pretty good given how mature this business unit is.
All of this will be overshadowed by how its Google Cloud division is doing. Google Cloud is Alphabet's cloud computing business unit, and it delivered incredible results in Q2. Revenue was up an outstanding 82% year over year, and its operating margin reached 36%. But this kind of growth is almost expected. During 2026, Alphabet expects to spend about $200 billion on capital expenditures, with nearly all of that going toward data centers.
Investors need to see a strong return on investment for the amount of money being spent, and if Google Cloud can inch toward growing at a triple-digit rate, then this spending makes a lot of sense. It most likely will, and there will be even more factors boosting it as well.
Alphabet has developed a leading AI computing chip, called a tensor processing unit, purpose-built for workloads. While these units were custom-designed for Alphabet's workloads, Alphabet has decided to sell them to external clients, creating a new revenue stream. Alphabet informed investors last quarter that TPU sales will ramp up through the end of 2026, with the majority of revenue realized in 2027. Still, investors want to know what this looks like, and we'll get a view into this on Oct. 28.
I think all of this adds up to a stock that will likely deliver excellent results, and so do Wall Street analysts. They estimate Alphabet will grow at a 25% rate -- pretty good for a big tech company. This adds up to a stock that could soar following earnings, and its valuation supports it.
Alphabet doesn't have a huge price tag
Averytin News Financial update.