Investors searching for the top artificial intelligence stock need look no further. Alphabet, the parent company of Google, has emerged as the clear winner in the AI race, delivering spectacular returns and showing no signs of slowing down.
From Legal Fears to AI Dominance
Just one year ago, the outlook for Alphabet was clouded with uncertainty. In August 2024, U.S. District Judge Amit Mehta declared Google a "monopolist," sparking fears of a potential breakup of the tech giant. Simultaneously, the explosive growth of OpenAI's ChatGPT, which rocketed from one million users to 300 million weekly active users by December 2024, threatened to disrupt Google's core search business.
These dual threats weighed heavily on the stock, pushing its valuation down to about 20 times estimated earnings. This was the lowest price-to-earnings ratio among the so-called Magnificent Seven stocks and even below the S&P 500's multiple of 22.
A Remarkable Turnaround and Record Gains
The past year, however, has told a completely different story. The feared breakup never materialized. In September, a judge proposed relatively mild antitrust penalties. More importantly, Google demonstrated a formidable ability to adapt, successfully integrating AI across its products.
The company has strung together four consecutive earnings beats and made a significant leap in AI with the launch of its Gemini 3 model on November 18. This resilience and innovation have propelled Alphabet stock to a 70% gain over the last 12 months, reaching a record high. The rally was significant enough to attract the attention of Warren Buffett's Berkshire Hathaway, which initiated a position in the company.
What Should Investors Do Now?
With the stock now trading at 26 times earnings, the question for investors is whether the rally has run its course. Barron's, which recommended the stock a year ago claiming it was undervalued by 50%, suggests investors should stay the course.
While a repeat of the past year's explosive gains is unlikely, strong business execution is expected to continue driving the share price higher. Analysts point out that even after the rally, Alphabet remains the second-cheapest stock in the Magnificent Seven, with only Meta Platforms trading at a lower P/E ratio.
The comparison with Meta is particularly telling. Both companies are investing heavily in AI, but Alphabet is already seeing a return on that investment. While Meta's pretax profit margins fell, Alphabet grew its third-quarter pretax profit by 39% and expanded its margins by seven percentage points, even as its capital spending surged to $24 billion from $13 billion a year earlier.
Key catalysts for future growth include:
- Earnings Growth: Wall Street expects 2025 earnings to exceed $10 per share, with 2026 estimates moving towards $12-$13.
- Google Cloud: Revenue is projected to jump from about $57 billion in 2025 to $75 billion in 2026, fueled by relentless AI demand.
- Gemini's Momentum: The AI model is quickly closing the gap with ChatGPT, boasting 650 million monthly active users and impressing with new features like Deep Think.
Analysts like Evercore's Mark Mahaney, who has a $325 price target on the stock, argue that Alphabet has proven its ability to use AI to create new revenue opportunities. The consensus is clear: while the easy money has been made, Alphabet is an AI winner that's still worth holding.
