From personalised recommendations to automated workflows, AI has moved from a nice-to-have feature to a core technology.
And, few companies are as deeply integrated into this shift as Alphabet Inc. (NASDAQ: GOOG).
AI has already been woven into the company’s platforms that are used by billions of people everyday.
From Google Search and YouTube advertising, to cloud services used by businesses worldwide.
Although the AI excitement has pushed up valuations across the tech sector, Alphabet has yet to be re-rated to the same extent as some of its peers.
That raises an interesting question for investors: Is Alphabet really undervalued or is the market correctly pricing in the risk?
AI Strengthening What Already Works
Alphabet is not building AI in isolation.
Instead, it is weaving it directly into the businesses that already generate billions in revenue.
- Search and Others
Search and advertising remain as Alphabet’s main revenue drivers.
With AI, the company is not just defending the business but is strengthening and expanding it through improved search results and refined ads targeting.
In other words, Alphabet is creating a better user experience and higher returns for advertisers, which ultimately supports pricing power.
- YouTube Ads
YouTube is another major AI beneficiary.
From improved recommendation algorithms that drive engagement, to creator monetisation tools, and to improving visual clarity of low resolution videos.
- Google Cloud
Alphabet’s fastest growing major segment, Google Cloud is a key AI battleground.
Google Cloud lets businesses use AI tools and infrastructure on a pay-as-you-go basis without managing the physical hardware.
As cloud customers adopt Alphabet’s AI-powered services, they consume more computing power, which directly increases cloud revenue.
- Other Bets
Alphabet’s “Other Bets” remain small financially but they still benefit from the group’s AI research and data advantage.
These early-stage projects provide long-term optionality without driving today’s earnings.
Alphabet’s AI Investment Strategy
Alphabet has been spending aggressively to secure its position in the AI race.
In 2025, the tech titan reported capital expenditure of US$91.45 billion, up 74.1% from 2024.
The investments were primarily for AI infrastructure such as data centres and networking equipment.
According to CEO Sundar Pichai, Alphabet’s targeted capital expenditure for 2026 ranges between US$175 billion and US$185 billion, almost double 2025’s investment.
However, Alphabet is not the only company with a massive commitment to AI.
Other tech giants such as Meta Platforms Inc (NASDAQ: META) and Amazon.com Inc (NASDAQ: AMZN) are also investing heavily into AI.
So now, the question is whether Alphabet can translate these investments into durable earnings power over the long term.
Recent Performance
Operationally, Alphabet continues to deliver steady growth, with revenue rising 15.1% to US$402.84 billion in 2025.
The core Google Search business, which accounts for slightly over half of Alphabet’s total revenue, contributed US$224.53 billion, up 13.3%.
YouTube ads and Google Cloud also saw a similar trend, with revenue jumping to US$40.37 billion (11.7% increase) and US$58.71 billion (35.8% increase), respectively.
In contrast, “Other bets” reported a 6.7% drop to just US$1.54 billion.
Alphabet’s operating margin held steady at 32% in 2025.
While revenue continued to grow, costs scaled at roughly the same pace.
As mentioned before, Alphabet’s capital expenditure surged 74.1% in 2025 to US$91.45, but even with the elevated investments, the company was still able to generate substantial free cash flow of US$73.27 billion for the year.
By the end of 2025, Alphabet held US$126.84 billion in cash, cash equivalents, and marketable securities.
Total current assets came in at US$206.04 billion, comfortably exceeding current liabilities of US$102.75 billion.
Alphabet also continued to return capital to shareholders through sizable share repurchases totalling US$45.71 billion in 2025.
As of 17 February 2026, Alphabet’s market capitalisation was around US$3.63 trillion with shares priced at US$302.82.
The Bull Case
What sets Alphabet apart in this AI race is that it is not betting entirely on new businesses to justify its valuation.
Instead, it has integrated AI to strengthen existing platforms that are already generating massive revenue.
Importantly, the tech titan can afford to play the long game thanks to its strong cash flow.
The Bear Case
That said, Alphabet is not risk-free.
One concern is how AI could change the way people use search.
If users rely more on AI-generated answers, there is a chance that traditional search ads could face pressure over time.
There is also the issue of rising cost which could weigh on margins if revenue growth slows.
Regulatory and antitrust scrutiny remains another overhang, particularly in the group’s advertising business.
In addition, the competition in AI is intense.
Much better models could be developed by Alphabet’s peers, resulting in its AI-enriched platforms losing relevance.
Understanding Alphabet’s Valuation
Retail investors should look beyond headline valuation metrics.
Although a metric such as free cash flow is a useful anchor as it shows whether the business remains fundamentally strong, it does not always capture long-term earnings potential.
This is especially so during heavy investment phases.
Comparing Alphabet’s valuation with peers that have similar AI exposure can also provide useful insights.
Also, patience matters.
AI is unlikely to transform earnings overnight, but its benefits will compound steadily over time.
Get Smart: Don’t Just Chase AI Hype
Alphabet’s AI investments are not speculative side projects.
They are embedded within its core businesses, reinforcing already dominant platforms.
The real issue for investors is valuation.
If AI merely protects Alphabet’s existing dominance, the stock may be fairly priced.
But if AI meaningfully enhances monetisation efficiency and cloud profitability over time, today’s multiple could prove conservative in hindsight.
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Disclaimer: Charlyn T. owns shares in Amazon.
