Alphabet's Fastest-Growing Segment Makes the "Magnificent Seven" Stock an AI Leader
Key Points
Alphabet has proved the earlier critics wrong, as it's a clear leader in the AI race.
In Q4, this booming segment posted nearly 50% year-over-year revenue growth and a 30% operating margin.
Thanks to a cost advantage and switching costs, there's a wide economic moat present.
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Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is a loser when it comes to artificial intelligence (AI). At least this was the narrative from market prognosticators a couple of years ago. These days, however, the Google parent is a clear leader as it relates to this exciting technology.
Let's take a closer look at Alphabet's fastest-growing segment and what it is doing to make this "Magnificent Seven" stock an AI powerhouse.
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Alphabet's performance is up in the clouds
During the fourth quarter, Google Cloud reported impressive year-over-year revenue growth of 48%. Compared to a 30% gain in Q4 2024, this was a notable acceleration. With nearly $59 billion in total sales last year, this single segment now represents 15% of Alphabet's entire top line.
Based on market share, Google Cloud is still in third place in the overall cloud computing industry. However, its Q4 growth rate came in well ahead of its larger competitors. Amazon Web Services registered a 24% revenue gain in its comparable quarter, while Microsoft Azure posted a 39% increase.
The cloud market as a whole has benefited from enterprises moving their IT workloads off-site. In recent years, however, there has been robust demand for AI capabilities.
Google Cloud's recent win stands out. "I'm pleased that we are collaborating with Apple as their preferred cloud provider and to develop the next generation of Apple Foundation Models, based on Gemini technology," CEO Sundar Pichai said on the Q4 2025 earnings call.
Google Cloud is a financial and strategic boon
As Google Cloud continues to contribute more to Alphabet's revenue base, it's also boosting the bottom line. Last quarter, this segment had a stellar operating margin of 30% from operating income of $5.3 billion. That's a major improvement from an operating loss of $480 million in Q4 2022. As these trends persist, Google Cloud is on pace to represent a much larger portion of Alphabet's profitability five or 10 years from now.
The segment benefits from a clear cost advantage. Years of investing in the technical infrastructure are now paying off handsomely. In this industry, scale is the name of the game. As Google Cloud keeps growing, it will be better able to leverage its fixed costs. This should support higher margins over time.
And Google Cloud's customers must deal with high switching costs. When businesses decide to work with a specific cloud provider, their IT systems must be transitioned off-premises. You can imagine that this would cause a lot of operational effort. And once a customer signs on with Google Cloud and things are working seamlessly, it makes sense that they are unlikely to leave for a rival's offering.
From a competitive standpoint, Google Cloud is thriving.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.
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