This article first appeared on GuruFocus.
Alphabet Inc. (NASDAQ:GOOG) heads into earnings after the close with investor expectations stretched, following a sharp re-rating that has pushed the stock to record levels and lifted its valuation to the highest point in roughly 18 years. The shift in sentiment marks a notable turnaround from earlier concerns that Alphabet was losing ground in artificial intelligence, with investors now pointing to progress across AI models, custom semiconductors, cloud computing and its nearly $300 billion-a-year digital advertising business. That combination has driven Alphabet’s market value to about $4.1 trillion, placing it within striking distance of Nvidia Corp. (NASDAQ:NVDA) after adding more than $2 trillion over the past eight months, while shares were modestly higher early Wednesday.
Much of the renewed optimism reflects developments since Alphabet last reported earnings in October, making this release the first real checkpoint for bulls. The November rollout of the latest Gemini AI model was well received and helped reassure investors around Alphabet’s position in advanced AI, while its tensor processing unit chips are increasingly viewed as a strategic advantage inside Google Cloud. Some investors believe cloud could show strong growth over the next several years and translate into rising free cash flow, alongside continued strength from YouTube and Waymo, the autonomous driving unit that recently raised $16 billion at a $126 billion valuation, nearly triple its valuation from October 2024.
The earnings test comes as markets grow more sensitive to AI spending and returns. Revenue is expected to rise 17% with earnings per share up 23%, even as 2026 capital expenditures are projected to increase about 28% to $117 billion and the stock trades near 28 times estimated earnings, well above its long-term average. That backdrop follows slowing cloud growth at Microsoft Corp. (NASDAQ:MSFT), which triggered a sharp selloff, while Meta Platforms Inc. (NASDAQ:META) rallied after issuing a stronger revenue outlook despite heavy investment. Against that contrast, and after a $285 billion rout tied to a new AI automation tool from Anthropic PBC, investors appear confident Alphabet could justify elevated spending if growth holds, though expectations leave limited room for error.
