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SUMMARY
Parkev Tatevosian, CFA, provides a comprehensive analysis of Alphabet's recent performance, emphasizing the company's robust AI business, surging cloud backlog, and strategic capital investments. He concludes with a reaffirmed buy rating, citing Alphabet's strong fundamentals and fair valuation despite a higher share price.
MAIN POINTS
- The discussion opens with a focus on Alphabet's AI business and the management team's highlighted factors, including the company's strong performance in the workspace segment.
- Alphabet's cloud backlog nearly doubles quarter over quarter, driven by enterprise AI demand and the introduction of TPU hardware sales to third parties.
- The company updates its capital expenditure guidance to $185 billion at the midpoint, reflecting increased confidence due to unprecedented internal and external demand for AI compute resources.
- Alphabet signals that 2027 capital expenditures will significantly exceed those of 2026, with estimates ranging from $225 billion to $300 billion, benefiting partners like Broadcom and TSMC.
- The analysis concludes with a positive outlook, as Alphabet's backlog, hardware demand, and revenue growth lead to a reiterated buy rating and an updated intrinsic value per share matching the current market price.
DETAILED ANALYSIS
Alphabet has demonstrated exceptional performance in its most recent quarter, particularly within its AI and cloud businesses. The Google Workspace segment achieved strong double-digit revenue growth, fueled by both an increase in users and higher per-seat pricing. A standout development was the near doubling of Alphabet's cloud backlog, which reached $462 billion at the end of Q1.
This surge was primarily attributed to robust enterprise demand for AI offerings and the unexpected inclusion of TPU hardware sales, marking Alphabet's expansion into selling proprietary chips to third-party customers. This diversification is notable, as it provides a lower-risk revenue stream compared to backlogs held by competitors relying on specific clients like OpenAI or Anthropic.
The competitive landscape in AI hardware remains dominated by Nvidia, but persistent supply shortages have opened opportunities for Alphabet and Amazon to supply their own chips, which offer competitive price-to-performance ratios for customers not requiring the absolute cutting edge. Alphabet plans to begin recognizing revenue from TPU hardware agreements later this year, with the majority of related revenues expected in 2027, signaling a long-term growth trajectory.
Alphabet increased its capital expenditure guidance to $185 billion at the midpoint, incorporating the acquisition of Intersect and reflecting confidence in sustained demand for AI compute resources. Management projects that 2027 capital expenditures will be significantly higher than in 2026, with estimates suggesting spending could reach between $225 billion and $300 billion. This anticipated investment benefits not only Alphabet but also key partners such as Broadcom, Taiwan Semiconductor Manufacturing Company, and Nvidia, all of whom contribute to the AI ecosystem.
Despite concerns about potential oversupply in the future, current demand remains extremely strong, justifying the scale of ongoing investments. Alphabet's top-line growth exceeded 20%, with expenses rising less than expected and minimal increases in employee headcount. These factors contributed to a minor increase in intrinsic value per share, now aligning with the market price.
The company is viewed as a Hall of Fame business trading at a fair valuation, leading to a reiterated buy rating as of May 4, 2026.
LINKS
- YouTube channel membership for exclusive perks and early access to content.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a six-step investing framework.
- Discounted access to Fiscal.ai, a primary data source for investment research.
- Subscription link for Parkev Tatevosian's free monthly Substack newsletter.