The Top Cloud Stock for AI Investors to Buy Before It Surges 20%

Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) third-quarter earnings report was a revelation. The parent company of Google showed why it's one of the best artificial intelligence (AI) stocks as it recorded a $100 billion quarter in revenue. And analysts took notice.

Two of them updated their ratings on Alphabet stock on Oct. 30, a day after the company's earnings release. Scotiabank set its price target at $336, and JPMorgan set its target at $340.

The twin price targets represent a 20% jump for Alphabet stock from its price at the time of this writing.

Will it hit that price target? I think it will, sooner rather than later. But one of the biggest drivers that will help it get there will be the continued growth of a unit that's playing second fiddle right now to the company's advertising business.

Let's look at why cloud computing and Google Cloud are the quiet powerhouses behind the next leg of Alphabet's growth.

Image source: Alphabet.

The potential of Google Cloud

Data centers are growing by leaps and bounds these days as hyperscalers are pouring hundreds of millions of dollars into ramping up computing power, storage, and networking resources. The global data-center market was valued in 2024 at $347.6 billion and is projected to have a compound annual growth rate of 11.2% through 2030, reaching $652 billion, according to Grand View Research.

That's where Google Cloud competes. It's one of three major hyperscalers, along with Amazon Web Services (AWS) and Microsoft Azure. AWS is the top company, with 29% market share, and Azure has 20%. Google Cloud is in third place with 13%, followed by Alibaba, Oracle, Salesforce, and IBM Cloud.

That positioning gives Google Cloud plenty of opportunity to grow its market share. And even if it holds steady in the 13% range, the fast-growing data center space will mean plenty of profits for Alphabet.

In the third quarter, Google Cloud accounted for $15.15 billion in revenue, up 33% from the previous year. Operating income from the segment increased from $1.95 billion a year ago to $3.59 billion in the current quarter.

Management said Google Cloud ended the quarter with a $155 billion backlog, up 46% year over year, and it signed more deals for the segment valued at more than $1 billion in 2025 than it had in the previous two years.

Alphabet said that it will accelerate capital expenditures (capex) to a range of $91 billion to $93 billion in 2025, up from its previous estimate of $85 billion, to meet demand.

CEO Sundar Pichai emphasized Google Cloud's importance while speaking to analysts:

I do think a big part of what differentiates Google Cloud, effectively, we have taken a deep full-stack approach to AI, so we are -- and that really plays out. We are the only hyperscaler who is really building offerings on our own models. And we are also highly differentiated on our own technology. ... I think that does give us the opportunity to continue driving growth in operating margins in Cloud, as we have done in the past.

Google Cloud's role in 2026 and beyond

Alphabet is first and foremost an advertising company. Google Advertising accounted for 72% of the company's total revenue, bringing in $74.18 billion for the quarter. Google Search and YouTube ads both showed double-digit growth.

And that's important because the revenue stream is vital for Alphabet to continue growing Google Cloud. It's almost inconceivable for a company to have more than $90 billion in capex, but hyperscalers are doing it. And Alphabet can do that while still maintaining a huge cash hoard of $23.2 billion.

The strength of Alphabet's advertising business gives it a beautiful opportunity to expand Google Cloud and work to steal market share from Amazon and Microsoft. Analysts are clearly buying in, which is why that 20% gain in stock price looks increasingly likely, rather than a pipe dream.

JPMorgan Chase is an advertising partner of Motley Fool Money. Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, International Business Machines, JPMorgan Chase, Microsoft, Oracle, and Salesforce. The Motley Fool recommends Alibaba Group and 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.