1 Reason Alphabet Stock Could Deliver Massive Returns by 2027

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) hasn’t merely performed well of late. Last year’s 65% share price spike not only led all seven of the Magnificent Seven names, but extends what’s now grown to a 280% gain since the stock’s early 2023 low. Wow!

This sort of heroic gain often intimidates interested investors, of course — it’s just a tough act to follow, particularly given the stock’s valuation of 30 times this year’s projected per-share profits.

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There’s one reason, however, Alphabet shares could keep on trucking this year and end up markedly higher by this point in 2027. And that reason is (unsurprisingly) artificial intelligence (AI)-related … mostly.

Alphabet’s recently released fourth-quarter numbers were a breath of fresh air in an environment marred by disappointing results and outlooks from a few too many technology stalwarts. Google’s parent turned $113.8 billion worth of revenue into a per-share profit of $2.82 versus year-ago comparisons of $96.5 billion and $2.15, handily topping analysts’ expectations for a top line of $111.4 billion and a bottom line of $2.63 per share.

As expected, the company’s going to nearly double its capital expenditures in the year ahead, with the majority of that investment going toward AI infrastructure. The only problem with this plan? It’s at odds with recently raised concerns that some tech companies — including Microsoft and Oracle — are spending too much on AI and achieving too little return on their investment thus far.

Alphabet appears to be a rightful exception to this worry, though. Unlike many of its peers, every dollar it’s been spending on artificial intelligence has been money well spent.

The graphic below tells the tale, comparing Google cloud computing arm’s (where its AI data center business’s results are reported) revenue to this unit’s operating income. Revenue growth is accelerating, reaching $17.7 billion during the three-month stretch ending in December. Its cloud unit’s operating income is growing at an even faster clip, however, to $5.3 billion last quarter.

Whatever Alphabet is doing on this front, it’s doing it right.

Alphabet’s AI-led cloud business isn’t its breadwinner, to be clear. Google search and its other Google-branded offerings still collectively account for most of the company’s operating income.

Cloud now makes up about 15% of Alphabet’s top and bottom lines, though, and it’s easily the organization’s fastest-growing arm with last quarter’s explosive 48% year-over-year improvement, while cloud’s operating income more than doubled during this timeframe. That’s enough to move the company-wide needle, so to speak, far more than most investors appreciate just yet. They’ll figure it out over the course of this year.

This is still just the beginning, though. An outlook from Mordor Intelligence suggests the worldwide artificial intelligence data center industry is poised to grow at an average annual pace of 25% though 2031, when it will be three times as big as it is now. Armed with equipment like its new purpose-built Tensor Processor Units, this company stands ready to continue winning at least its fair share of the market’s growth.

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James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Oracle. The Motley Fool has a disclosure policy.

1 Reason Alphabet Stock Could Deliver Massive Returns by 2027 was originally published by The Motley Fool