Investment Review №334. Customer return

While the technology sector is seeing turbulence amid fears of an AI bubble, Alphabet (GOOGL) shows impressive resilience and is now approaching the all-time $4 trillion market-cap milestone. Shares of Microsoft (MSFT), Nvidia (NVDA), and Meta (META) have declined by double digits since the Nasdaq peak on October 29, but Alphabet is up 18%, making it the third most valued publicly traded company in the world, behind Nvidia and Apple (AAPL). This is particularly encouraging for my readers, as we highlighted Alphabet in the summer at $235 per share, whereas now it trades around $320—an increase of 36% in just three months. I typically avoid revisiting the same investment story within a year, but we’re seeing a fundamental reshuffle in the AI market, a revaluation of leading chip vendors, and a recalibration of investor views on major developers of generative AI models.

Previously, a key point of the company’s attractiveness was its valuation: it traded below its historical averages and looked much cheaper than other AI-focused names. Now, however, the stock trades at a sizable premium—and in our view, for good reason. Alphabet’s key competitive advantage is its unprecedented vertical integration in AI. The company has developed Gemini 3, including the popular Nano Banana photo-editing and image-generation model, by training it based on its own infrastructure using its proprietary TPU chips. This effectively makes Google a combination of OpenAI and Microsoft, with addition of Nvidia. Meta is in talks to purchase billions of dollars’ worth of Google’s TPU chips. Besides, Alphabet has already signed an agreement with Anthropic to deliver up to 1 million chips. We expect Meta’s capital expenditure in 2026 to be at least $100 billion, of which $40–50 billion is likely to be allocated to purchasing chips for inference.

The main reason most tech companies experience margin pressure is the need to finance massive capital expenditure. With annual revenue of about $385 billion, largely from advertising, Alphabet plans to allocate $91–93 billion to CapEx in 2025. That is equivalent to only 23% of this year’s revenue, compared with 35% for Meta and Microsoft. Alphabet’s leverage is also minimal: its total debt-to-pre-tax-profit ratio is just 0.4x, versus 0.7x for Microsoft and Meta.

The company has a strong financial position and is growing in a highly competitive environment. Google, for example, controls about 90% of global search traffic, ensuring unmatched distribution for AI models. A TD Cowen survey found that Gemini usage increased from 24% to 26% over three months, while ChatGPT’s share declined. A recent courtroom victory over a government-led attempt to break up the company, together with an investment by Warren Buffett’s Berkshire Hathaway, has further reinforced Alphabet’s position and reduced some risks.

With a current market capitalization of roughly $3.8 trillion and strong growth momentum, Alphabet has a realistic chance of becoming the first company in the world to reach a $5 trillion mark. It is in a unique position: the combination of a resilient advertising business, leadership in AI, proprietary chip development, and prudent financial management provides a solid foundation for continued growth, even as competitors come under increasing pressure from investors.