Profit is proving as easy as ABC
ALPHABET
Market value 2025 revenue
$3.8 trillion (est) $400bn
Google’s engineers need some sleep. That is the word from chief executive Sundar Pichai after the company launched its latest AI model, Gemini 3, almost ten days ago. It has been an intense time for its owner Alphabet, which also unveiled the latest version of Nano Banana AI, an image tool developed by Google DeepMind that lets users upload photos or type simple prompts to edit or generate images.
The updates caused a stir across the tech world, which hailed Gemini for its advanced capabilities. “The leap is insane — reasoning, speed, images, video … everything is sharper and faster. It feels like the world just changed, again,” said Marc Benioff, boss of Salesforce, who added that he was “not going back” to Gemini’s competitor ChatGPT.
The new model can help doctors read scans faster, create transcripts for podcasts automatically and spot problems in machines before they break, Google boasted.
The world certainly has changed — at least temporarily. To date, Gemini, the name for Google’s family of AI models, has not had the brand recognition of ChatGPT, now synonymous with chatbots. The Gemini AI app has more than 650 million users each month; ChatGPT had 800 million.
Could this be Alphabet’s moment? Investor chatter has been about whether it can break through a market valuation of $4 trillion.The reverberations of the launches went far beyond chatbots. Gemini’s latest AI iteration was trained by Google’s own AI processors. At a stroke, these Tensor Processing Units (TPUs), made by the search engine giant, threatened Nvidia’s dominance in the AI semiconductor market.
The two members of the Magnificent Seven — the seven tech firms that have driven stock market growth in the past few years — saw their share prices go in different directions. Meta, an Nvidia customer, is reported to be in discussions toaccess TPUs, while Anthropic, an OpenAI rival, has signed a deal to access up to a million of them.
It has been a rosy few months for Alphabet, which revealed strong results for the third quarter. Total sales were up almost 16 per cent year-on-year to $102 billion, with its Search division up 15 per cent, and there was growing demand for those TPUs. Following the earnings, Bank of America raised its expectation for net revenue at Alphabet by 4 per cent. This year sales are expected to be almost $400 billion and will hit $455 billion in 2026, according to a consensus forecast on FactSet.
Google’s cloud revenue backlog stands at $155 billion, up 43 per cent from $108 billion at the end of the second quarter and 30 per cent ahead of consensus expectations, driven by business demand for AI.Like others, it is investing heavily in AI infrastructure, with capital expenditure due to be $92 billion this year. HSBC analysts forecast a rise of 29 per cent to $120 billion next year.
While this spending creates nervousness, Alphabet has the cash to do it. But even Pichai admits there is some “irrationality” in the AI boom and that any bubble-bursting would blow back on his business.
The battle for AI supremacy is hard fought and no company can afford to be smug. One risk for Google is the challenge to its ad business from OpenAI, which is laying the groundwork to embed ads inside ChatGPT itself and recruiting staff for an internal ad team as a way to monetise its vast user base.Then there is regulatory pressure.
Alphabet missed profit expectations because of a $3.5 billion fine from the European Commission for favouring its own ad-tech services and it recently swerved a potential breakup on anti-trust grounds in the US. But for how much longer? Beyond AI, Google has also made investments in driverless car firm Waymo, which is taking off globally with a recently announced move into Britain. Pichai said Google’s “bets” for the next ten years are in the cloud and quantum computing, and it is exploring ideas from data centres in space to drone deliveries.
Alphabet has a price to earnings ratio of about 28 for the next year, aligned with its peers. Warren Buffett’s Berkshire Hathaway is a believer, with a $4.3 billion stake in Alphabet announced in the third quarter, and it is thought to have made at least a $1.4 billion paper profit from its holding.
ADVICE Buy
WHY With its own AI models and chip technology, Alphabet will be hard to beat
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