The aggressive push by Alphabet into artificial intelligence has created a clear divide among market experts. While some point to surging cloud revenue as a powerful growth engine, others warn of unprecedented capital expenditure. This tension raises a critical question: can the company’s current valuation withstand the dual pressures of accelerating revenue and massive investment?
Valuation Concerns Amidst Heavy Spending
Not all analysts share an optimistic outlook. On December 16, Gravenhurst Capital downgraded its rating on the stock from “Buy” to “Hold,” assigning a discounted cash flow (DCF) based price target of $258. This figure sits considerably below more bullish market projections.
The central investment debate centers on three key factors:
- Revenue Momentum: Robust growth in Google Services and Cloud, fueled by the Gemini AI platform and related products.
- Investment Burden: Capital expenditure (CapEx) for 2025 is now projected to reach between $91 and $93 billion, marking a historic peak.
- Cash Flow Impact: Despite rising revenues, this level of spending is expected to place significant pressure on Alphabet’s free cash flow.
These elements highlight a fundamental clash of perspectives: a growth-at-all-costs narrative versus a more cautious valuation model that heavily weights the cost of capital. The stock’s performance reflects this uncertainty, closing at €260.90 in its latest session. While it has seen a slight weekly pullback, the shares remain up more than 40% year-to-date.
Cloud Acceleration Fuels Analyst Confidence
A noticeable acceleration in Alphabet’s cloud business is driving optimism for several researchers. On December 16, BMO Capital Markets reaffirmed its “Outperform” rating and modestly raised its price target from $340 to $343.
The bank now forecasts Google Cloud revenue growth of 39% for the fourth quarter of 2025 and 40% for the first quarter of fiscal 2026. A primary catalyst, according to BMO, is the integration of the Claude model as a preferred tool for developers, aimed at accelerating enterprise AI adoption. Furthermore, BMO anticipates that enterprise AI applications will scale significantly by 2027, providing sustained tailwinds for overall corporate revenue.
Should investors sell immediately? Or is it worth buying Alphabet?
Building the Foundation for an AI Future
To support its ambitious AI growth, Alphabet is undertaking a massive infrastructure expansion. A new 21-year agreement with TotalEnergies will secure 1 terawatt-hour of renewable energy annually starting in 2026 for data centers in Malaysia. This move addresses the soaring power demands of compute-intensive AI workloads, as reliable energy sources are critical for executing the company’s strategic plans.
Simultaneously, subsidiary Waymo adds a layer of valuation potential. Reports indicate the robotaxi specialist is currently negotiating a funding round exceeding $15 billion, which would imply a valuation of over $100 billion. This underscores the substantial market value attributed to autonomous driving solutions within the Alphabet conglomerate.
Assessing the Underlying Fundamentals
Alphabet’s current market capitalization stands at approximately $3.73 trillion. In its most recent third-quarter report, the company delivered strong results that supported its valuation:
- Earnings Per Share (EPS): $2.87 (consensus estimate: $2.29)
- Revenue: $102.35 billion
The majority of analysts continue to rate the stock as a “Buy” or “Strong Buy.” In particularly bullish scenarios, price targets—such as the one from Morgan Stanley at $415—remain elevated. From a technical perspective, the stock trades near its 52-week high, well above its longer-term moving averages. A Relative Strength Index (RSI) reading of just under 60 suggests the stock is neither in extreme overbought nor oversold territory.
In summary, Alphabet faces a clear trade-off. Powerful growth in cloud and AI, coupled with valuable holdings like Waymo, underpins a premium valuation. However, this very growth demands investments on a previously unseen scale. The crucial factor for the coming quarters will be whether the additional revenue and margins can visibly and substantially outweigh the planned CapEx exceeding $90 billion.
Ad
Alphabet Stock: Buy or Sell?! New Alphabet Analysis from January 31 delivers the answer:
The latest Alphabet figures speak for themselves: Urgent action needed for Alphabet investors. Is it worth buying or should you sell? Find out what to do now in the current free analysis from January 31.
Alphabet: Buy or sell? Read more here...
