Alphabet (NASDAQ: GOOGL), the parent company of ubiquitous search engine Google, put the Magnificent in the Mag 7, ending 2025 as the top performer in the group, with a 66% return.
This was a different outcome from what some expected earlier in the year, when concerns that Alphabet had fallen behind in the AI race weighed on its stock.
While Alphabet certainly deserves its bouquets, the question now is whether this stellar 2025 performance can continue this year.
What Drove Alphabet’s Strong 2025 Performance
Alphabet’s share price started picking up in the second half of 2025 (2H2025), driven by improving financial numbers through the year, along with increased optimism over its AI initiatives.
First, there was a recovery in digital advertising spending, which remains the company’s biggest segment.
Alphabet’s 1Q2025 results showed that revenue for the Google Search business grew by 10% year on year.
This growth accelerated as the year went on.
By 3Q2025, growth in Google Search revenue has further accelerated to a year-on-year increase of 14%.
Investors were willing to overlook a slight deterioration in Alphabet’s operating margin, which fell from 32.3% in 3Q2024 to 30.5% in 3Q2025.
On the plus side, the operating margin for Google Cloud rose from 17.1% in 3Q2024 to 23.7% in the most recent quarter, which will help the company’s bottom line.
Second, investors have realised that Alphabet will not be left behind in the AI race.
This optimism was partly due to the success of its Gemini Chatbot, which came out ahead of rivals like ChatGPT and Claude across a range of benchmarks in testing by WebDev Arena, an AI ranking site.
By September, Gemini had topped Apple’s App Store, due to the popularity of Nano Banana, its image-editing feature.
Gemini Is a Catalyst — But Not the Whole Story
Optimism around Alphabet’s AI initiatives extends beyond Gemini itself.
Alphabet is using AI to enhance all seven of its two billion-user products – Android, Chrome, Gmail, Maps, Play Store, Search, and YouTube.
Examples include improved recommendations on YouTube, and enabling advertisers to use image generation tools to produce high-quality images.
As one of the “big three” global cloud companies, Google Cloud is another way for Alphabet to deploy AI to help its customers – and its own bottom line.
Google Cloud provides its clients the ability to access advanced computing and a variety of genAI models.
The company is also applying AI to its “Other Bets” category of moonshot businesses, the most prominent being Waymo, which offers fully autonomous ride-hailing services in multiple US cities.
Valuation After the Rally
Alphabet’s shares are certainly more highly valued now than they were half a year ago.
For example, back in July 2025, its shares were trading at a P/E ratio of around 20x (on a trailing 12-month basis), compared to about 33x today.
However, compared to other members of the Mag 7, Alphabet is still in the middle of the pack, and is trading slightly lower than the median P/E ratio.
| Company | P/E ratio (trailing 12 months) |
| Alphabet | 32.9 |
| Amazon | 33.7 |
| Apple | 34.6 |
| Meta | 27.5 |
| Microsoft | 32.5 |
| Nvidia | 46.3 |
| Tesla | 302.5 |
| Median | 33.7 |
Source: Yahoo Finance, as of 15 January 2026
So, Alphabet is no longer as cheap as it was half a year ago, but is still fairly valued within its peer group – although some may reasonably argue that the Magnificent 7 as a whole is overvalued.
In order for Alphabet’s shares to rise further, investors will want to see continued monetisation of AI through its existing products, resulting in acceleration of revenue and profit at Google Search, YouTube Ads, and Google Cloud.
Continued adoption of Gemini is also key.
For example, the recently announced partnership between Apple and Google to bring Gemini into products like Apple Intelligence and Siri is one way to keep investors on board, even at higher valuations.
Finally, Alphabet will also want to show progress on its other bets, such as Waymo, so that some can start contributing to operating income.
The company says it expects to see Waymo “scaling up” in 2026.
Key Risks Investors Should Watch
What are the key risks that investors should look out for?
First, the ever-present spectre of regulatory scrutiny, in the US and other markets.
Alphabet dodged a major bullet in 2025, when the US courts declined to impose the most severe penalties after finding that the company’s online search business had violated antitrust laws.
But there are still other cases pending against it in the US, including a hearing over remedies after Alphabet was found to have illegally monopolised the adtech market.
The European Commission is also investigating Google for potential breaches of the EU’s Digital Markets Act, as well as its use of web publishers’ content and YouTube material to power its AI services.
Second, Alphabet’s rising AI spend is also a cause for concern.
Over the past 12 months, it incurred nearly US$78 billion in capital expenditure, an amount that will “significantly increase” going forward, as big tech firms err on the side of spending more to ensure they capture opportunities in AI.
Indeed, all this spending on hard assets takes these Silicon Valley giants away from their traditional asset-light model, which was responsible for their earlier success.
Get Smart: Great Businesses Can Still Be Overpriced
Despite the increase in spending, Alphabet continues to generate strong cash flow.
Its free cash flow for the trailing 12 months as of 3Q2025 was US$73.5 billion, almost 32% higher year on year.
However, this figure is also prone to big swings, depending on its capital expenditure.
Still, after 2025’s stellar share price performance, the margin for error is smaller — hence, investors assessing whether to buy the stock should focus more on its bottom line and the return on its capital investments, rather than just the AI hype.
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Disclosure: Silas H. does not own shares in any of the shares mentioned.
