From personalized recommendations to automated workflows, AI has moved from a nice-to-have feature to a core technology.
And few companies are so deeply embedded in this change. Alphabet Co., Ltd. (NASDAQ:GOOG).
AI is already built into the company’s platform, which is used by billions of people every day.
From Google search and YouTube ads to cloud services used by businesses around the world.
While the rise of AI has boosted valuations across the tech industry, Alphabet has yet to be revalued to the same extent as some of its peers.
This raises interesting questions for investors. Is Alphabet really undervalued, or is the market pricing in the risk correctly?
Alphabet isn’t building AI alone.
Instead, we’re building it directly into a business that already generates billions of dollars in revenue.
Search and advertising remain Alphabet’s main revenue drivers.
By leveraging AI, the company not only protects its business, but also strengthens and expands it by improving search results and refining ad targeting.
In other words, Alphabet creates a better user experience and higher revenue for advertisers, which ultimately supports pricing power.
YouTube is also a big beneficiary of AI.
From improved recommendation algorithms that drive engagement, to monetization tools for creators, to improved visual clarity for low-resolution videos.
As Alphabet’s fastest growing major segment, Google Cloud is a key battleground for AI.
Google Cloud allows businesses to use AI tools and infrastructure on a pay-as-you-go basis without having to manage physical hardware.
When cloud customers adopt Alphabet’s AI-powered services, they consume more computing power, which directly increases cloud revenue.
Alphabet’s Other Bet remains financially small, but still benefits from the group’s AI research and data advantages.
These early-stage projects offer long-term options without driving today’s revenues.
Alphabet is spending aggressively to secure its place in the AI race.
In 2025, the tech giant reported capital expenditures of US$91.45 billion, an increase of 74.1% from 2024.
Investments were primarily in AI infrastructure such as data centers and network equipment.
According to CEO Sundar Pichai, Alphabet’s 2026 capital expenditure target is in the range of US$175 billion to US$185 billion, which is almost double the amount invested in 2025.
However, Alphabet isn’t the only company making major AI efforts.
Other tech giants: Meta Platforms Co., Ltd. (NASDAQ:Meta) and Amazon.com Inc. (NASDAQ: AMZN) is also investing heavily in AI.
So the question is whether Alphabet can turn these investments into sustainable profitability over the long term.
Alphabet continues to see steady growth on the business front, with revenue in 2025 increasing by 15.1% to reach USD 402.84 billion.
The core Google search business, which accounts for just over half of Alphabet’s total revenue, contributed 13.3% to US$224.53 billion.
Similar trends were seen for YouTube Ads and Google Cloud, where revenue soared to USD 40.37 billion (up 11.7%) and USD 58.71 billion (up 35.8%), respectively.
In contrast, ‘other bets’ were reported to have decreased by 6.7% to just US$1.54 billion.
Alphabet’s operating profit margin remained stable at 32% in 2025.
Revenue continued to grow, but costs grew at about the same pace.
As mentioned earlier, Alphabet’s capital expenditures jumped 74.1% to US$91.45 in 2025, but despite the increased investments, the company was still able to generate a significant free cash flow of US$73.27 billion annually.
By the end of 2025, Alphabet had US$126.84 billion in cash, cash equivalents, and marketable securities.
Total current assets amounted to USD 206.04 billion, comfortably exceeding current liabilities of USD 102.75 billion.
Alphabet also continued to return capital to shareholders through large-scale share buybacks totaling US$45.71 billion in 2025.
As of February 17, 2026, Alphabet’s market capitalization is approximately USD 3.63 trillion, and its stock price is USD 302.82.
What makes Alphabet stand out in this AI race is that it hasn’t bet entirely on new businesses to justify its valuation.
Instead, we integrated AI to enhance our existing platform, which is already generating significant revenue.
Importantly, the tech giant has the wherewithal to play the long game thanks to its strong cash flow.
However, Alphabet is not without risks.
One concern is how AI could change the way people use search.
Traditional search advertising may come under pressure over time as users become more reliant on AI-generated answers.
There’s also the issue of rising costs, which could weigh on profits if revenue growth slows.
In particular, the group’s advertising business remains subject to strict regulations and antitrust scrutiny.
Additionally, competition in the AI field is fierce.
Better models may be developed by Alphabet’s peers, resulting in the AI-enhanced platform losing relevance.
Individual investors should look beyond the headline metrics.
Metrics like free cash flow are useful indicators of whether a business is fundamentally doing well, but they don’t necessarily capture long-term earnings potential.
This is especially true when large investments are being made.
Comparing Alphabet’s valuation to peers with similar AI exposure can also provide useful insights.
Patience is also important.
AI is unlikely to change your bottom line overnight, but its benefits will steadily increase over time.
Alphabet’s AI investments are not speculative side projects.
These are integrated into the core business and enhance an already dominant platform.
The real issue for investors is valuation.
If AI simply protects Alphabet’s existing advantages, the stock could be worth a lot.
However, if AI significantly improves monetization efficiency and cloud profitability over time, today’s multiples may prove conservative in hindsight.
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Disclaimer: Charlyn T. owns stock in Amazon.
The post Alphabet’s AI push: Is the stock still undervalued? appeared first on The Smart Investor.
