This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Tesla and Alphabet stocks have surged as investors bet the two companies are well-positioned to capitalize on big AI opportunities.
- Tesla's AI story leans on self-driving technology and plans to build humanoid robots.
- AI is central to Alphabet's entire business.
Over the past six months, Tesla (NASDAQ: TSLA) and Alphabet (NASDAQ: GOOGL) have both delivered eye-catching gains as investors seemingly crowd into anything tied to AI (artificial intelligence). Tesla shares are up more than 45% in that span, while Alphabet has climbed nearly 70% and is closing in on a $4 trillion market capitalization.
The stories behind those moves look very different. Tesla is still primarily an electric vehicle company trying to reinvent its future around autonomous driving and humanoid robots. Alphabet, meanwhile, generates cash from search advertising, YouTube, and a fast-growing cloud computing business -- and it is threading AI into all of these offerings.
Both companies could end up major winners from AI in 2026 and beyond. Yet when valuation and these companies' underlying business fundamentals are weighed together, Alphabet arguably looks like the better option for investors looking for more investment exposure to AI.
Tesla: AI could transform its business
The bull case for Tesla stock these days hinges less on boosting electric vehicle sales and more on converting its AI efforts into scalable software and services. At least, that's the only way to explain the stock's valuation, which features a price-to-earnings ratio of just over 300 as of this writing. Tesla's autonomous driving network (Robotaxi), its autonomous driving subscriptions, and its humanoid robot efforts (Optimus) sit at the center of that ambition.
Recent financial results, however, highlight the gap between that vision and today's reality.
In the first half of this year, Tesla's revenue fell 10.6% year over year to $41.8 billion as automotive sales dropped almost 18%. Third-quarter results improved, with revenue rising about 12% year over year to $28.1 billion. But operating income still declined about 40% -- and operating margin for the period was only 5.8% (down from 10.8% in the year-ago period). In addition, the rebound in sales trends may prove to be temporary, because the period benefited from a pull-forward in demand as consumers rushed to place orders before the federal electric vehicle credit expired on Sept. 30.
Management has been clear that AI is a major reason profitability remains under pressure. Not only has it been a significant driver of research and development spending recently, but management expects AI to weigh on its business next year.
"On the [capital expenditures] front," said Tesla chief financial officer Vaibhav Taneja in the company's third-quarter earnings call, "while we are expecting to be around $9 billion for the current year, we're projecting the numbers to increase substantially in 2026 as we prepare the company for the next phase of growth in terms of not just our existing businesses, but our bets around AI initiatives, including Optimus."
This spending may pay off if Tesla can scale and commercialize its Robotaxi network and move Optimus from demonstrations to meaningful production. For now, however, almost all of Tesla's revenue still comes from its cyclical auto business, as well as its smaller but fast-growing energy business.
Alphabet: More profitable and cheaper
Alphabet's AI push looks more incremental but also more durable than Tesla's. Google Search and YouTube already rely heavily on machine learning to match users with relevant information and ads, and Alphabet's cloud computing business, Google Cloud, is selling AI infrastructure and tools directly to customers. Overall, Alphabet's move to integrate AI across its business seems to be creating an inflection in revenue growth.
Alphabet's third-quarter revenue rose 16% year over year to $102.3 billion, with Google Cloud up 34% and both search and YouTube delivering solid growth as new Gemini-powered features rolled out across the portfolio.
Profitability and cash flow help the story.
Alphabet's earnings per share in Q3 increased more than 35% year over year, and Alphabet generated about $48.4 billion in cash from operations during the period, bringing the total for the first nine months of 2025 to more than $112 billion. Cash and marketable securities on the balance sheet sit around the $98.5 billion mark, and the company continues to return capital through share repurchases and a modest dividend while still funding heavy AI investment.
Like Tesla, Alphabet's management expects its investments to rise from already high levels due to AI. Indeed, not only did management lift its full-year outlook for capital expenditures when it reported its third-quarter results, but it said it expects "a significant increase" in capital expenditures next year. Investments to support its AI-capable compute power for Google Cloud represent the primary driver for its capital expenditures.
The better bet for 2026 and beyond
Ultimately, the scale tips in favor of Alphabet for two primary reasons.
First, Alphabet's business is more established than Tesla's and is able to generate substantial profits -- and do so on a more consistent basis.
More importantly, however, the Google parent has a much cheaper valuation than Tesla's. Alphabet trades at 31 times earnings, and Tesla's price-to-earnings ratio is just over 300. Even when looking at price relative to analysts' consensus forecasts for earnings per share over the next 12 months (forward price-to-earnings), the chasm between the two remains massive. Alphabet trades at about 23 times forward earnings, and Tesla trades at close to 200 times forward earnings.
Sure, Tesla and Alphabet both hold significant promise when it comes to AI's impact on their businesses next year (and beyond). Tesla's upside rests on breakthroughs in full self-driving and robotics that could eventually reshape its economics. But the company is navigating a challenging environment in autos and a stock price valuation that is borderline egregious. Meanwhile, Alphabet faces its own risks, including regulatory scrutiny and the chance that its massive AI infrastructure doesn't pay off as well as expected. Still, its combination of strong cash generation, a cash-rich balance sheet, and a much lower valuation multiple arguably makes it the more attractive way to participate in AI heading into 2026.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
