Alphabet's Secret Weapon in the Global Artificial Intelligence (AI) Race

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) hasn't been projected as the top dog in the artificial intelligence (AI) arms race. While some may describe it as an overall "leader," others are hesitant to bestow that title on it. However, investors should reconsider that notion, as Alphabet has a secret weapon in the AI race that could boost its generative AI model, Gemini, to the top.

What is this secret weapon? It's none other than its cloud computing segment, Google Cloud.

Google Cloud is growing the quickest among its rivals

Cloud computing is a massive part of the AI arms race that not enough people discuss. Many of the largest cloud providers are the ones buying up truckloads of Nvidia GPUs to provide computing power to their clients. Few companies have the resources to purchase a supercomputer to train their respective AI models, so they turn to a cloud computing provider like Google Cloud to rent their computing power.

However, in the world of AI, there are more capable pieces of hardware than Nvidia GPUs. Custom AI accelerators, like the Google tensor processing unit (TPU), can vastly outperform Nvidia GPUs in particular tasks. The catch is that a workload must be set up in a particular way, which can take a lot of time.

This is why GPUs remain popular, as they are better suited for a wide variety of workloads that don't have to be configured in a certain way. Still, both products remain popular among clients and are a winning combination for Google Cloud.

Alphabet isn't alone in its cloud computing offering. Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) each have their own offerings, Amazon Web Services (AWS) and Azure. Furthermore, they have a market share advantage, with AWS holding 31% of the market and Azure at 20%, according to Synergy Research Group.

Google Cloud is in third place with a 12% share, but its growth rates may not keep it in that position for long. In the time frame encompassing Q3 (Q1 FY 2025 for Microsoft), each cloud computing division put up the following growth figures:

Data sources: Alphabet, Microsoft, and Amazon.

Google Cloud grew the fastest of the three during the Q3 time frame, which is a trend that has been going on for some time. Google Cloud provides Alphabet with a solid growth boost, making the stock more relevant to today's tech investors who expect massive growth each quarter. Still, the stock is quite the bargain right now.

Alphabet's stock is cheap

Companywide, Alphabet grew its Q3 revenue at a 15% year-over-year pace. That's solid growth on the top line, but the biggest gains were realized on the bottom line. Earnings per share (EPS) rose from $1.55 last year to $2.12 this year -- a 37% rise. A large part of this gain came from Alphabet's operating margin increasing 4 percentage points from 28% last year to 32% this year.

Of the $7.2 billion in increased operating profits, $1.7 billion, or about a quarter, came from Google Cloud's improving operating margin. Its operating margin was 17% in Q3, but it still has plenty of room to expand. AWS is the industry leader in this regard, putting up a 38% operating margin in Q3. So, Alphabet can still squeeze a lot of profits from this segment to improve its overall financial picture.

When a given company grows revenue at 15% and EPS at 37%, you'd expect the stock to trade at a premium to the market since these figures will lead to vast outperformance. However, that's not the case.

GOOGL PE Ratio (Forward) data by YCharts

At 21.4 times forward earnings, Alphabet trades below the S&P 500's valuation of 23.8 times forward earnings. That is a healthy discount to the broader market and shows how much of a value Alphabet's stock is right now. Google Cloud will help Alphabet in the AI arms race, and the stock is underpriced, making it a terrific buy right now.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.