Alphabet’s AI Dominance: Why Its Fallback Plan Could Outshine Search Itself

Google's parent company isn't just playing defense—it's rewriting the rules.

When AI eats search, Alphabet's got a secret weapon.

The $1.7T tech giant's moonshot division has quietly built an AI stack that bypasses traditional search entirely. No queries. No blue links. Just answers—before you even ask.

Wall Street's still pricing Alphabet like a glorified ad vendor. Meanwhile, DeepMind's bleeding-edge models are already powering everything from drug discovery to quantum computing.

Here's the cynical take: If AI disrupts search revenue, Alphabet's diversified bets will make Meta's metaverse pivot look amateur hour.

Google Cloud is seeing massive AI-powered growth

Even if Search gets disrupted to some degree -- though I don't believe that will happen quickly -- it appears Alphabet's Google Cloud unit could make up the difference...and then some.

Last quarter, Google Cloud grew revenue 32% to $13.6 billion, accelerating from the prior quarter's 28% growth, while operating margins widened tremendously, nearly doubling from 11.3% to 20.7% over the course of the year. It should also be noted that of the $3.3 billion in incremental revenue relative to last year, $1.65 billion fell to operating profits, so Google Cloud is making operating margins above 50% on every incremental dollar of cloud revenue.

Google Cloud's backlog also surged 18% sequentially -- good for a 72% annualized rate -- and 38% year over year to $106 billion. That's higher than the current revenue growth rate, suggesting the unit could continue to accelerate, or at least keep up its current high growth rates for a while.

There is such hot demand for Google's cloud infrastructure and such high returns on its assets that management decided to increase its capital expenditure plan for 2025 from $75 billion to $85 billion. And why not? The company is clearly seeing huge demand for Cloud services, and very profitable demand at that. If a business is earning such high returns on incremental investments, it should invest all that it can.

Google Cloud is becoming a platform of choice for AI start-ups

While Alphabet doesn't break down cloud growth by cohort, it's likely that a big reason for the strong Cloud growth is demand from premier AI unicorns. On the second-quarter conference call with analysts, CEO Sundar Pichai said: "We also offer the industry's widest range of TPUs [tensor processing units] and GPUs [graphics processing units], along with storage and software built on top. That's why nearly all gen-AI unicorns use Google Cloud."

Indeed, Google Cloud's AI unicorn customer list is impressive, encompassing the cream of the crop in AI talent today:

Image source: Getty Images.

This isn't a comprehensive list, and Google also has big enterprise customers, including. It's also encouraging that two of the biggest AI model builders, OpenAI and Anthropic, still choose to run workloads on Google Cloud despite their primary relationships being with other cloud providers and major investorsand, respectively.

Why has Google become such a destination for AI start-ups? While that discussion WOULD be long and highly technical, the attraction appears to be based on a combination of factors. First, Google was the first cloud company to begin designing its own AI chips, or "tensor processing units," back in 2014, in order to power its artificial intelligence research experiments more cost-effectively.

On that subject, Google is the tech giant that has been studying AI seriously for the longest time. Although OpenAI was the first to unveil ChatGPT and assumed the lead in AI chatbots, before that, Google had been the monopolistic center of AI research. Google researchers invented "transformers" technology, the main innovation that catapulted AI technology to the next level over the past eight years or so.

It appears that Google's legacy position at the forefront of AI research -- even though it was initially caught off-guard by ChatGPT in late 2022 -- has informed its knowledge of AI infrastructure, paving the way for Google Cloud's recent success.

Google Cloud can pick up the slack

Over the course of a year, Google Cloud's operating profit ROSE 141%, going from 4.3% of total operating income to 9.1%. Given that Google is accelerating investments and appears to have an accelerating cloud backlog, look for that percentage of profits to increase quickly.

Over time, if Search growth slows or even declines, Google's own AI service based on its Gemini large language model (LLM) could pick up the slack. But even if that doesn't happen, it appears there's a good chance that the next big AI breakout could be one of Google Cloud's AI unicorn customers. That would lead to growth in Google Cloud profits, offsetting a slowing or decline in Search.

And if Alphabet is able to ward off the threat to Search, the stock will look like one of the biggest bargains on Wall Street, with its cloud business playing a huge part.