This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The rise of artificial intelligence (AI) has served as an unprecedented bellwether for technology stocks over the last three years. In particular, semiconductor stocks including Nvidia, Taiwan Semiconductor Manufacturing, and Broadcom were all ushered into the trillion-dollar club thanks to the AI revolution.
As investment in AI infrastructure continues to unfold, I think it's likely that chip stocks will remain sound investment choices. But as 2026 approaches, I see a different tech titan taking center stage: Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG).
Let's dig into how Alphabet has built an AI fortress poised to dominate the future. From there, I'll explore the company's valuation trends and make the case for why now is a great time to buy Alphabet stock hand over fist.
It's been a quiet three years for Alphabet...until now
The AI revolution kicked off almost exactly three years ago when OpenAI commercially launched ChatGPT. ChatGPT quickly captured the imaginations of people all over the world with its ability to answer virtually any question instantly.
The dramatic rise in popularity among large language models (LLMs) caused some on Wall Street to pose the idea that traditional search tools like Google were headed for doom. Think of the business stakes at hand here: Why would advertisers continue paying a premium on platforms like Google and YouTube when everyone's attention was flocking to chatbots?
While Alphabet's advertising business did show some signs of stalling, the company's cash cow remained somewhat resilient. For a couple of years, revenue from Google and YouTube wasn't as robust as it once was, but it also wasn't plummeting at an alarming rate.
What many investors were overlooking, however, was Alphabet's other ventures. At the beginning of the AI revolution, Google Cloud was operating at an annual revenue run rate of about $29 billion. Meanwhile, this segment of Alphabet's business was unprofitable.
Fast forward to today, and Google Cloud is now on pace for more than $50 billion of annual sales while boasting positive operating income. What's even more interesting is that Google Cloud has won major deals with both OpenAI and Anthropic -- the two LLMs that were once seen as the ultimate existential threat to Google's relevancy.
Besides the success of its cloud division, Alphabet has also successfully launched its own LLM -- called Gemini. According to management, Gemini has over 650 million monthly active users (MAUs) while search queries are increasing threefold quarter over quarter.
Why 2026 could be epic for Gemini
For most of the AI revolution, I think the consensus view around Alphabet was one of uncertainty. While not everyone bought into the extinction of Google narrative, it's fair to say that it took some time for Alphabet to prove its AI ambitions were bearing fruit.
One of the biggest catalysts the company has going into next year is an extension of Google Cloud through commercializing custom hardware. Specifically, Alphabet's application-specific integrated circuits (ASICs), known as tensor processing units (TPUs), have seen some early traction with Apple and Anthropic.
While TPUs aren't going to dethrone Nvidia's GPU business anytime soon, I think Alphabet is on the cusp of unlocking a new wave of growth in the cloud infrastructure market that's currently dominated by Amazon Web Services (AWS) and Microsoft Azure.
Alphabet stock could soar to new highs next year
As of this writing, Alphabet's forward price to earnings (P/E) ratio is hovering around 28 -- its highest level during the AI boom.
GOOGL PE Ratio (Forward) data by YCharts
Normally, I tend to stay away from momentum stocks. More times than not, by the time a company reaches a record high, it's dicey to buy the premium and expect shares to move materially higher.
This is a rare instance where I think the opposite is true. Alphabet's current price increase reflects two factors: An appreciation for the company's current operating performance and a bullish outlook that Alphabet will keep up its strong performance.
Alphabet's ecosystem -- from search, cloud computing, consumer electronics, custom hardware, and more -- is a major differentiator compared to its mega cap peers. The company has a unique flexibility stitched into its DNA -- benefiting from AI across its various assets and subsidiaries during any market cycle. These dynamics position Alphabet as a particularly durable business for the long run.
As investments in AI infrastructure are expected to continue rising going into next year, I expect Alphabet to benefit from these tailwinds more so than any one singular chip designer or software developer.
With this in mind, I think Alphabet will continue to show signs of accelerating revenue and profit margin expansion across its entire business next year -- which should lead to even more buying from shareholders. Against this backdrop, I see Alphabet as the best opportunity in the AI landscape as 2026 approaches.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
