Key Points
Alphabet is spending up to $205 billion this year to expand its AI infrastructure.
The spending is already paying off, with Google Cloud revenue surging 103% in the third quarter and operating income tripling to $11.1 billion.
It's far cheaper than the average tech stock, making it a great AI stock for 2027.
Many companies are tapping into the artificial intelligence (AI) boom in their own way. Two companies in this sector are already seeing benefits, and it has helped reinforce their status among the "Magnificent Seven" -- seven mega-cap, tech-heavy companies that have driven a huge share of U.S. stock market gains in recent years.
Microsoft (NASDAQ: MSFT) is integrating AI agents into its legacy software and renting out cloud computing capacity through its Azure services. And Apple (NASDAQ: AAPL) recently launched an update to Siri AI to better answer users' questions and debuted new devices that it says are optimized to run AI. I have no doubt that these two Magnificent Seven companies will succeed in the AI era in their own way.
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But if I had to pick a different Magnificent Seven stock to buy for 2027 and beyond, it would have to be Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). Its investments in Google Cloud are already paying off, and its shares look like a bargain right now.
Here's why it's worth buying Alphabet stock right now.
Image source: The Motley Fool.
Playing the long game with AI
Alphabet stock fell hard recently after the company reported negative free cash flow of $9.1 billion for the third quarter, which ended Sept. 30. That was the second consecutive quarter of negative free cash flow, and investors were understandably concerned.
But they also may have missed two important things related to its cash flow. The first was that a substantial portion of the loss resulted from a $5.2 billion one-time fee paid to the European Commission. The second is that management has successfully built out a behemoth of an AI cloud service in Google Cloud, and it could generate significant revenue and earnings for years to come.
Google Cloud revenue surged 103% year over year in the quarter to $30.7 billion, making it Alphabet's fastest-growing segment by far. Management says it will allocate between $195 billion and $205 billion to capital expenditures, which is a lot, but with the goal of broadening its AI services even further. What's more, Google Cloud now has $561 billion in backlogs, half of which will be realized as revenue over the next 24 months, the company says.
Google Cloud's growth in the quarter is a good indicator that Alphabet's spending is paying off. But it's not just the revenue that's important; Google Cloud also has impressive operating margins of 36.2%, up from just 23.7% in the year-ago quarter. The combination of growth and higher margins led to Google Cloud operating income more than tripling in the quarter to $11.1 billion.
And there could be plenty more where that came from. As more companies integrate AI agents into their software, they increasingly need to tap into cloud services to run their businesses. This is creating a huge AI cloud market that Goldman Sachs estimates will be worth $2 trillion by 2030.
Alphabet stock looks like a good deal right now
Not only is Alphabet benefiting from the current AI boom and poised for more growth from its current AI investments, but its stock is also a really good deal right now. Its trailing price-to-earnings is just under 15, far less expensive than the tech sector's average price-to-earnings ratio of 32.
The stock already looked like a good deal over the past several months, but the recent AI sell-off has made it look like a bargain heading into 2027.
And while I think there are legitimate concerns about AI spending eventually slowing down, it doesn't appear to be happening anytime soon. Bank of Amerca estimates tech companies will double this spending over the next few years, reaching $2.1 trillion by 2028.
And even if Alphabet does have to pull back in the near future, the money it's spending now will likely continue to pay off in the coming years as demand for AI cloud services rises.
Bank of America is an advertising partner of Motley Fool Money. Chris Neiger has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Goldman Sachs Group, and Microsoft. The Motley Fool has a disclosure policy.