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Google-owner Alphabet has enjoyed a renaissance over the last 12 months with the shares gaining 71%, handsomely outperforming the technology-focused Nasdaq Composite index.
The strong rally has recently pushed Alphabet’s market capitalisation through the $4 trillion mark, becoming only the fourth company in history to achieve this milestone, alongside Nvidia, Microsoft and Apple.
The investment narrative has shifted from a company with a vulnerable ‘legacy’ search business playing catch up to a leading AI player and potential competitor to chip designer Nvidia.
What is Gemini 3 and why has it made such a splash?
On 18 November 2025 Google began the roll out of Gemini 3, its most significant large language model to date and, unlike prior releases it was integrated across the entire Google ecosystem from day one.
This had the effect of accelerating real world adoption because it was directly available to billions of users across Google search, the Gemini app and Google’s developer platforms.
Gemini 3 seems to have laid down a serious challenge to competitor models including ChatGPT, owned by OpenAI, and Claude, owned by Anthropic, which is looking to IPO the business in 2026 at a market value of up to $350 billion.
Alphabet’s custom-made AI chips could be a game changer
An important difference with Gemini 3 is that it was built with custom made TPU (Tensor Processing Unit) chips, co-designed with Broadcom, which are specifically made to accelerate machine learning.
Google’s TPUs provide performance and efficiency at a lower cost than Nvidia’s advanced Blackwell chips, which means they could challenge Nvidia’s dominance and provide a new revenue stream for Alphabet.
Google and Apple recently announced a multi-year collaboration whereby the next generation of Apple products will be based on Google’s Gemini models and cloud technology.
The two tech giants are no strangers to working together. Google pays Apple an estimated $20 billion a year to be the default search engine on Apple’s Safari web browser in a revenue sharing deal.
Google receives a 37% share of the advertising revenue earned on searches made on Safari.
In another big tech tie-up, it has been reported that Alphabet is in discussions with Meta Platforms for the Facebook owner to rent custom-made chips from Google Cloud.
What about the threat to Google from declining searches?
Google reconfigured its search engine into a ‘question engine’ with the introduction of AI-mode in mid-2025 which, provides comprehensive, conversational answers using generative AI.
These summaries sit at the top of results, synthesizing information from dozens of sources to provide an immediate answer.
They have transformed Search into a chatbot-style interface that handles complex, multi-step queries by breaking them into multiple research streams. Google recently introduced a feature called Search Live which allows users to interact via a microphone.
Google has optimised its algorithm to prioritise citations within AI summaries rather than just ranking for a link. If a brand is cited by Gemini as the authoritative source, it gains a ‘trust seal’ that google uses to drive traffic.
The company claims that links provided within AI summaries often receive more clicks than traditional clicks because they are highly targeted.
How does Alphabet make money?
Advertising revenue contributes more than two-thirds of Alphabet’s total revenue, with cloud services and subscriptions contributing the rest.
For over 20 years Google’s proprietary search technology has helped advertisers and publishers power their digital marketing businesses.
In the early days Google’s model was based on its search interface sending traffic to external publisher websites, but the introduction of ChatGPT has impacted this channel (referred to as Google Network) and reduced its importance over time.
Today, more than 90% of Google’s advertising revenue flows to properties inside the Google ecosystem including Search and YouTube.
Alphabet is very profitable with the business generating 32% operating margins and annual free cash flows of $73.3 billion, equivalent to 64% of revenues.
What is Alphabet’s strategy?
CEO Sundar Pichai has pivoted Alphabet’s strategy to a vertically integrated ‘AI-First’ powerhouse, rather than trying to defend its legacy search business.
One of the implications of this shift has been a significant increase in capital expenditures to fund global data centres and scale its custom TPU chips and servers.
Data centres are power hungry, so a new leg of the strategy is to invest in energy infrastructure to secure power for the data centres. The $4.75 billion acquisition of Intersect in December 2025 is part of Alphabet’s ambition to secure clean energy and bypass potential power grid bottlenecks.
Alphabet is aiming to monetise the Gemini ecosystem with the launch of Enterprise AI agents for businesses, integrating directly with Google Workspace and Google Cloud.
A good example is the recent landmark strategic partnership with value retailer Walmart which effectively turns Gemini into a digital storefront with instant checkout features.
What about Alphabet’s ‘moonshots’?
Alphabet’s X division is increasingly spinning out moonshot projects as independent companies through a dedicated venture fund.
The most significant projects are autonomous driving company Waymo and drone delivery business Wing.
Waymo is targeting one million weekly paid rides by late 2026 and recently announced plans to enter the UK.
The company’s drone delivery business Wing has completed hundreds of thousands of deliveries across three continents.
In the US the business operates in the Dallas-Fort Worth area, working with Walmart, serving 60,000 homes from two Supercentres.
Finally, there is an actual moonshot, in the shape of Alphabet’s roughly $900 million investment in SpaceX, made in 2015.
SpaceX is currently valued at around $800 billion in private markets, but it is reportedly targeting a valuation as high a $1.5 trillion for an IPO (initial public offering) which could happen in 2026 or early 2027. This would value Alphabet’s stake at around $110 billion.
There is a strategic angle to the investment in SpaceX related to Alphabet’s AI infrastructure needs because Space-based infrastructure offers unlimited solar energy.
Proponents argue that space data centres can rely on solar power, avoid cooling costs and operate at a fraction of the cost of ground-based equivalents.
According to consultancy Research and Markets, the space data centre market could grow from $176.7 million in 2029 to $3.9 billion by 2035, small in absolute terms, but significant as a new infrastructure category.
Business performing well, but capex questions raise doubts
Alphabet revealed a blow-out set of earnings on 4 February with fourth quarter revenues increasing 18% year-on-year to $113.8 billion, ahead of analysts’ forecasts of $111.4 billion.
Operating income increased 32% to $35.9 billion equating to a margin of 32% while EPS (earning per share) was 31% ahead at $2.82 compared with $2.63 expected by analysts.
Google cloud continued to see strong demand as quarterly revenues increased by 48% to $17.7 billion.
YouTube registered over 325 million paid subscriptions, led by strong adoption of Google One and Premium YouTube.
Google’s Gemini app exited the quarter with more than 750 million monthly active users while Google Search saw more usage than ever before, with AI continuing to drive an expansionary moment.
However, investors were taken aback by Alphabet’s projection for capital expenditures which are projected to double in 2026 to a range of $175 billion to $185 billion.
For context, 2026 capital expenditures will be more than the combined expenditures over the last three years ($176.3 billion) and more than double 2026 free cash flow of $73.3 billion.
How does Alphabet’s valuation compare with peers?
Alphabet trades on a similar forward PE (price to earnings) ratio to Amazon of around 29 times, which is a premium to both Meta Platforms and Microsoft which are on 22 times forward earnings.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
