£10,000 invested in Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) shares six months ago would now be worth around £17,600. That’s a gain of roughly 76% in half a year — and, with the pound/dollar exchange rate broadly unchanged over the period, currency movements haven’t flattered the result.
The rally reflects a shift in investor sentiment towards the Google owner.
After spending much of 2023 and early 2024 under pressure from artificial intelligence (AI)-related fears and heavy capital spending, Alphabet has reasserted itself as one of the market’s most powerful compounders. Strong advertising growth, improving margins, and renewed confidence in its AI strategy have all played a part.
TPUs, Gemini and more
But there’s been other factors too. The market’s increasingly interested in Alphabet’s ASICs, particularly its in-house tensor processing units (TPUs). These custom chips are designed specifically for AI workloads, allowing Alphabet to train and deploy large models more efficiently and at lower cost than relying solely on third-party GPUs.
While these TPUs are good for margins and security of supply, the market’s also become interested in the notion that Alphabet could sell them. For example, Meta’s reportedly in talks with Alphabet to buy billions of dollars of these TPUs. Is this a big new revenue stream for the company? Maybe.
However, the real focus should be on Alphabet’s core business. Investors had been worried that ChatGPT and the like would destroy the Search business — that hasn’t happened. Meanwhile, Cloud revenue surged 34%, improving diversification and strengthening the group’s overall resilience.
But there’s also Gemini. Gemini 3.0 — Google’s answer to ChatGPT — has made headlines, simply because it’s very good. I only have one AI app on my phone, and it’s Gemini. There’s probably good reason for that. It leads on reasoning and its image generator — Nano Banana — is really impressive.
What’s else has contributed to this rising share price? Well, a more favourable-than-feared resolution to the US Department of Justice case has helped lift sentiment. Developments in quantum computing — notably the Willow chip — have also reminded the market of Alphabet’s long-term optionality.
While commercial quantum applications remain some way off, progress at this level reinforces the company’s reputation for deep, defensible research that few rivals can match.
And remember, it’s also a robotaxi leader though Waymo.
The valuation
Of course, the last six months of growth is in the past. Now we need to look to the future.
Where will the stock go next? Well, the value play isn’t quite there anymore. It now trades at 29 times forward earnings and with a price-to-earnings-to-growth (PEG) ratio of 1.93. These are both premiums to the information technology sector average — around 15%-20%.
That doesn’t mean this stock’s overvalued however. Each company has its own merits and investors are starting to see Alphabet as a diversified player with significant stickiness is core businesses — eg Search dominance will remain in tact.
As always, there are risks. A recession, for instance, could result in weaker advertising demand, putting short-term pressure on revenues and margins. Regulatory scrutiny also remains a constant backdrop, particularly in the US and Europe, where changes to competition or data rules could affect how Alphabet operates.
However, I still believe it’s worth considering for the long run. The valuation data doesn’t scream Buy, but it’s a long-term diversified winner.
