Prediction: Alphabet's $200 Billion Bet Will Result in Huge Profit Growth
Key Points
There is still a significant amount of unmet demand for AI computing power.
Google Cloud's revenues are growing at a rapid rate.
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is increasing its already massive bets on the future of demand for AI computing infrastructure. In the company's most recent quarterly report, management upped its 2026 capital expenditure guidance to a range of $195 billion to $205 billion, setting $200 billion as the midpoint of anticipated AI spending. While some may scoff at this massive amount of money being spent, the reality is that there's a huge amount of money to be made in providing AI cloud infrastructure, and the evidence is already showing up in Alphabet's results.
The expansion of its hyperscaler business could result in massive profit growth for Alphabet, making the stock well worth buying at its current level.
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How Alphabet is converting its spending into income
Alphabet's approach to AI is two-pronged. First, it's using some of the computing capacity it is developing to power and train its in-house AI models. While many people have utilized the free version of Gemini via a Google search or by itself, there are also paid versions and plug-ins that allow Gemini to be used in other applications. This market isn't that much of a moneymaker, though -- it's more the table stakes required to be involved in the AI realm.
The real moneymaker is Google Cloud, its cloud computing unit. Cloud computing is a vital part of the AI industry, as most companies don't own the hardware necessary to build, train, and run AI applications, so to stay asset-light, they rent computing power from a provider like Google Cloud. Data center infrastructure for these customers is where the bulk of Alphabet's AI spending is going, and it's already paying off big time.
During Q2, Google Cloud's revenues rose by an incredible 82% year over year to $24.8 billion. Its operating margin also saw a major increase, expanding by about 15 percentage points to 36%. For reference, Alphabet's companywide operating margin was 34%. So, its fastest-growing division also has above-average profitability, which will allow its operating profits to expand at a rapid pace.
This mechanism will continue for a long time, as Alphabet's massive capital expenditures will give it more computing capacity, which is in massive demand right now in the AI community. Alphabet plans to keep expanding its data center footprint rapidly for several years, which could result in many years of elevated Google Cloud expansion, leading to a flywheel effect that pushes Alphabet to become a larger and larger business.
As a result, I think Alphabet is one of the best AI stocks to buy now and hold onto for the long run, as its capital expenditures are already having a massive effect on its current business.
Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.