Alphabet: Anthropic deal and Gemini momentum stand to deliver; Fair Value up 27%
We see faster cloud growth and improved longer-term profitability for Alphabet.
Key Morningstar metrics for Alphabet
- Fair Value Estimate: $300
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
Anthropic to expand its use of Alphabet’s AI accelerators
Anthropic announced a material expansion of its use of Alphabet GOOG/GOOGL’s AI accelerators. The deal, worth tens of billions of dollars, includes the use of Alphabet’s tensor processing units as well as traditional Google Cloud services, with more than 1 gigawatt of power coming online in 2026.
Why it matters: We believe Anthropic’s multibillion-dollar commitment is a vote of confidence in Alphabet’s TPUs as well as a material revenue driver. As artificial intelligence labs hunt for capacity, we see TPUs only growing in importance.
- With 1 GW of capacity earmarked for Anthropic in 2026, we believe this will bring in around $8 billion-$10 billion in sales annually, driving substantial growth in Google Cloud sales.
- We also view Gemini’s continued momentum, with the recent viral launch of Nano Banana, an image-focused model, as evidence of Alphabet flexing its AI muscles in the consumer space, a trend we expect to accelerate.
The bottom line: We raise our fair value estimate for wide-moat Alphabet to $300 per share from $237 as we bake in faster cloud growth and improved longer-term profitability. We view the shares as modestly undervalued going into the third-quarter earnings release on Oct. 29.
- We believe that the Anthropic deal may push other frontier labs still leveraged to Nvidia’s GPUs to rethink their training and inference silicon roadmaps and encourage them to include TPUs as part of their AI infrastructures, especially as capacity remains constrained.
- From a strategic perspective, we believe TPUs offer Alphabet not only a cost advantage as it comes to training and running inference on its own models but also an alternative monetization angle for its large AI capital expenditures.
Coming up: We expect the earnings report to further showcase Alphabet’s ability to not only benefit from continued AI monetization in Google Cloud but also retain double-digit growth in its core search business.
