Alphabet Just Announced Incredible News for Nvidia Stockholders

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) announced plenty of fantastic news for its own shareholders when it released earnings last week. The tech giant reported its first $100 billion dollar quarter -- to put this into context, just five years ago, quarterly revenue stood at about $50 billion -- and generated double-digit growth from its Google Services unit as well as Google Cloud.

The company also topped analysts' estimates for both revenue and profit in the quarter. But Alphabet didn't only deliver good news for those invested in its stock – what the company had to say also represents incredible news for another tech superstar and its shareholders. I'm talking about artificial intelligence (AI) powerhouse Nvidia (NASDAQ: NVDA). Let's take a look.

Image source: Getty Images.

Alphabet's relationship with Nvidia

First, it's important to understand the Alphabet-Nvidia relationship. Nvidia doesn't officially reveal the identity of its customers, but various clues, including comments from the customers themselves, allow us to point them out. And one of them is Alphabet, with the company's Google Cloud business offering Nvidia's top graphics processing units (GPUs) to its customers. These are chips and systems that power some of the most important tasks in AI such as the training and inferencing of large language models.

Nvidia supplies these platforms to Alphabet and other cloud service providers, making it easy for a wide range of cloud customers to access this high-powered compute. All of this has helped Nvidia's revenue to take off in recent years, climbing in the double- and triple-digits to record levels.

What this means is it's key for Nvidia investors to pay close attention to trends at companies like Alphabet as they often suggest whether Nvidia will see demand in the months ahead.

Now, let's turn to the latest clues from Alphabet. In the company's earnings report last week, it increased its forecast for capital expenditures this year to the range of $91 billion to $93 billion -- that's up from the earlier forecast of $85 billion. And, importantly, Alphabet said it's "investing to meet customer demand."

Serving AI demand

This investment will benefit Nvidia because most of it is going toward the ramp up of infrastructure to address the needs of AI customers. In the recent quarter, for example, 60% of the $24 billion in capex went to servers, and 40% covered data center and networking equipment. Nvidia's systems are a key part of this infrastructure buildout, so Alphabet's latest news suggests ongoing growth for Nvidia in the quarters to come.

This is fantastic news for Nvidia shareholders as it eases concerns about any potential slowdown in spending or a drop in demand. Nvidia is scheduled to report quarterly earnings on Nov. 19, and these trends at Alphabet offer us reason to be optimistic about the company's report and forecasts for future revenue.

During Nvidia's previous earnings report, in August, chief Jensen Huang predicted that AI infrastructure spending may climb to as high as $4 trillion by 2030. Investors should keep an eye on comments regarding demand and capex from Nvidia customers such as Alphabet in the coming quarters to see whether that might happen.

What does this mean for investors?

So, what does all of this mean for you as an investor right now? Nvidia, of course, isn't alone in the GPU market. The company faces competition from others such as Advanced Micro Devices -- and even customers like Alphabet are designing their own AI chips for certain purposes. But Nvidia's commitment to innovation means that those chips are unlikely to replace Nvidia's products. Companies such as Alphabet may offer and use their own chips, but they also are likely to invest heavily in Nvidia systems as these should continue to be the most powerful.

As a result, Nvidia is well positioned to maintain its leadership and deliver significant growth quarter after quarter as the AI boom marches on. So today, trading at 44x forward earnings estimates, the stock isn't cheap, but it's still a reasonable buy considering the company's dominance and potential for growth over the long term.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, and Nvidia. The Motley Fool has a disclosure policy.