Why Google’s Soaring Stock Is Defying Fears of an AI Bubble
Why Google’s Soaring Stock Is Defying Fears of an AI Bubble
Story by Dan Gallagher • 56m
Why Google’s Soaring Stock Is Defying Fears of an AI Bubble
Someone forgot to tell Google about the whole “ AI bubble” thing.
In a brutal month for tech stocks—especially those closely associated with the artificial-intelligence race—the internet-search giant has solidly bucked the trend. Parent company Alphabet’s stock has jumped around 16% since the Nasdaq peaked on Oct. 29, adding to a run that began in early September when the company won a court ruling that effectively ended worries about a government-imposed breakup.
Meanwhile, Microsoft, Oracle, Nvidia and Meta Platforms have seen double-digit declines since the Nasdaq high. Microsoft’s 13% drop has actually put its market capitalization below that of Alphabet’s for the first time since mid-2018, according to FactSet data.
That makes Google’s $3.8 trillion parent the world’s third-most valuable company, after Nvidia and Apple. The stock is now within about 4% of taking the company past the $4 trillion mark.
It isn’t as if Google has become some sort of AI counterplay. The company is squarely in the race to develop the most advanced AI models and is spending mind-blowing sums to do it.
But Google is making important strides in the AI race while also keeping its core business humming. Its parent still makes the bulk of its $385 billion in annual revenue from advertising.
At the same time, the company offers a level of AI vertical integration that even the other big tech companies can’t quite match. The recently launched Gemini 3 is a perfect example; Google trained its own frontier AI model on its own networks using its own TPU chips that it designed in-house.
That effectively makes Google into a combination of OpenAI and Microsoft with a bit of Nvidia thrown in. The strong performance of Gemini 3 on industry benchmarks may even be contributing to the more recent pressure on other AI stocks.
Google’s progress with advanced models and its own chips could be a troubling sign for Nvidia, Microsoft, Oracle and other major tech players that have a lot riding on OpenAI’s aggressive spending plans. “Google winning would actually hurt several stocks we cover—so prepare for volatility,” Ben Reitzes of Melius Research wrote in a note to clients on Monday.
One big advantage Google has in AI is that it still powers 90% of the world’s internet searches. This gives the company unmatched distribution for its AI models.
That helps offset OpenAI’s first-mover advantage with ChatGPT, which launched to the public three years ago. A survey by TD Cowen found that 26% of respondents used Google’s Gemini during the month of October compared with 35% who used ChatGPT. But Gemini’s usage rose by 2 percentage points from July, while ChatGPT’s slipped by a point in that same time, according to the survey.
ChatGPT’s launch initially cast a cloud over Google. It also set off a spending race among all the big tech companies seeking to carve out their own place in generative AI. That has resulted in nearly $321 billion in combined capital spending by Alphabet, Microsoft, Amazon.com, Meta and Oracle for just the first nine months of this year—nearly triple what those five spent in the same period two years ago.
Despite all that spending, it isn’t clear when the companies will see returns on their investments, or how lucrative they will be. That is what has given investors pause of late.
Meta’s stock has sunk 18% since the Facebook parent announced increased capital-spending plans during its third-quarter report last month. Chief Executive Mark Zuckerberg used the occasion to tout the company’s plan to “aggressively front-load” computing capacity to reach his goal of “superintelligence.” He said this could take up to five to seven years.
Why Google’s Soaring Stock Is Defying Fears of an AI Bubble
Google is hardly sitting out the spending race. The company said during its own quarterly call on the same day that its capital expenditures will be between $91 billion and $93 billion this year. This is up 75% from last year and triple its average from the three years before that.
That would amount to only 23% of Wall Street’s projected revenue for Alphabet this year. Meanwhile, Meta and Microsoft are on track to allocate 35% of this year’s revenue on capital spending.
Despite a recent $25 billion bond sale, Alphabet carries a much lower relative debt load than its big tech peers. This gives it the flexibility to add some leverage without taking on substantial risk.
Among its peers, the company has the highest balance of cash net of debt. CreditSights estimates Alphabet’s total debt plus lease obligations to be only 0.4 times its pretax earnings versus 0.7 times for Microsoft and Meta.
The one rub is that Google’s parent no longer counts as an unloved bargain. At around 29 times projected earnings, Alphabet’s shares are more expensive than they have been in years, though they are on par with the Nasdaq and most of the other megacap tech companies.
Beating back the government’s breakup efforts unlocked a lot of value. Pulling in front of the AI pack—on its own terms—justifies Alphabet’s headier valuation.
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