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We believe Alphabet is transforming into an AI-first organization. If we are right, this represents a seismic, albeit critical shift, underscoring its commitment to leading the AI revolution with an agility and depth the market may only be beginning to grasp. After-market, Alphabet delivered numbers that exceeded expectations. On its earnings call, it was clear that Alphabet is not simply integrating AI; it’s resetting its business model around AI, touching all aspects of the business, from core infrastructure and consumer engagement to new, high-growth markets like enterprise solutions and autonomous driving.
Alphabet’s Full-Stack AI Strategy: Powering Unmatched Scale and Efficiency
CEO Sundar Pichai explained that Alphabet’s AI strategy is based on three core pillars: “First, a robust AI infrastructure… Second, world-class research teams… And third, a broad global reach through products and platforms that touch billions of people and customers around the world.” This approach highlights Alphabet’s advantage in delivering AI across products at scale, reaching over two billion monthly active users across seven products and platforms like Search, YouTube, and Android.
Pichai’s Pillars:
Cutting-Edge Infrastructure: Enabling Cost-Efficient Scale: Alphabet’s recent engineering and hardware advancements have reduced the cost per AI query by over 90% in 18 months. Pichai elaborated, “We have lowered machine cost per query significantly… while doubling the size of our custom Gemini model.” These optimizations come from Alphabet’s proprietary data centres, custom processors, and a global fibre network, which serve as a foundation for highly scalable, cost-effective AI deployments across products. This reduction enables Alphabet to maintain and even expand margins as AI adoption accelerates across sectors, creating a virtuous cycle that few competitors can match.
World-Class Research, Speed & Agility: Alphabet’s expertise in AI research continues to drive ground breaking innovation, at speed. Recently, Google DeepMind co-founder and Director were awarded the 2024 Nobel Prize for AlphaFold, underscoring the calibre of Alphabet’s research talent. However, this example doesn’t reflect the broader cultural adjustment that Pichai described "we are organising the company to operate with speed and agility," when referring to the pillars supporting AI development.
AI Demand: Exponential Growth and Enterprise Integration: Alphabet is meeting unprecedented demand for AI solutions, particularly in the enterprise sector. Google Cloud delivered strong numbers ahead of expectations, reporting a 35% increase in revenue largely due to enterprise adoption of its AI-powered solutions. Demand for Alphabet’s Gemini models has soared, with API calls up by 14x in six months. Further, the leaders of tomorrow are building their businesses with Alphabet, as ~90% of generative AI unicorns and over 60% of funded generative AI startups are Google Cloud customers.
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Other Segments are Strong:
YouTube’s Growth: Continuing Paradigm in Content and Engagement
YouTube’s has now generated $50 billion in combined advertising and subscription revenue, over the past year, for the first time. The platform’s AI-powered content recommendation, combined with investment in sports and creation tools are driving deeper engagement, personalizing user experiences, and expanding Alphabet’s digital advertising reach. The rise of YouTube’s ad revenue highlights the potential for AI to fuel not just new products but also long-term monetization in mature ones.
Waymo: Pioneering Role in Autonomous Mobility
Waymo, Alphabet’s autonomous vehicle unit, has recently completed a funding round at a valuation twice its last round in 2020. The service is delivering 150,000 paid rides, amassing a substantial dataset of over one million miles, per week.
The potential for Waymo is vast, with opportunities to license its driverless technology to automakers and logistics companies, enabling substantial share in the multi-trillion-dollar market, over time. Unlike other players, Waymo’s AI-first model benefits from Alphabet’s scalable infrastructure and advanced research capabilities, making it the most mature autonomous solution in the industry.
Search Reinvention: AI Enhancing User Experience and Engagement
The recent rollout of AI-enhanced Search features to over 100 countries showcases Alphabet’s ability to maintain its dominance while innovating to meet user needs. With AI overviews in Search, Alphabet has created an experience that is not only faster and more intuitive but also one that drives greater engagement. This will hit more than 1 billion consumers and early indications are that it is increasing Search usage. This is critically important as the bears have argued that Google's monopolistic position in Search may have been vulnerable to competitors such as Perplexity and OpenAI. This argument has likely suppressed the multiple, which we believe has now troughed. Management expects new AI led features to continue rapidly.
Investment Implications: Reassessing Alphabet as an AI-First Company
Ahead of numbers, Alphabet’s stock was approaching trough level valuations, on an absolute and relative basis. We do no think this is justified given the product suite of captive users who are actively integrating and relying on their AI infrastructure and unique value proposition for customers.
We expect Alphabet’s dominance to compound through operational efficiencies and higher margins. For example, we learnt that ~25% of Alphabet’s code is now generated by AI, and thus reducing development timelines and accelerating product output for engineers.
Alphabet’s evolution into an AI-driven organization is more than a strategic pivot—it represents an enhancement of its core business model. The market may not fully recognize the implications of this shift, but as Alphabet expands its influence in AI and autonomous mobility, the long-term growth potential and strategic advantage will become increasingly evident.