How Alphabet Is Building an End-to-End AI Business

On the July 27, 2026, episode of The Morning Filter podcast, hosts Susan Dziubinski and Morningstar Chief US Market Strategist Dave Sekera discuss Alphabet’s GOOGL latest earnings report. Here is an excerpt from the show.

Alphabet’s AI Monetization Gains Momentum

Susan Dziubinski: We also saw Alphabet stock pull back about 7% after earnings. Morningstar maintained its $433 fair value estimate on the stock. What stood out to you in Alphabet’s earnings report?

Dave Sekera: Really strong earnings report when you think about a company this size and just how much they’re still able to grow. As far as the top line goes, they beat our estimates there. I think the top line grew 24%. If you look at Google Cloud—that’s where they host AI platforms—that was up 82%. Operating margin overall expanded by 200 basis points. And that, of course, was really driven by that cloud segment. The operating margin there expanded by 15 points.

Overall, we think the company’s making substantial progress on its AI monetization. Specifically, our team points to the backlog for Google Cloud. The backlog there now is over $500 billion. It was about $100 billion a year ago. Google search, as much as Google already controls the search market, that was still up 17%. So, a lot of good monetization using AI within their own business.

When I think about the investment thesis here and having talked to our analyst, this is probably one of the only few AI plays out there that we see them being involved in the entire AI stack. When you think about it, they have their own AI models that they’re able to use both internally as well as sell externally. They’re building AI semiconductors for their own use that they’re now also starting to sell externally. You have all the infrastructure that they’ve built for Google Cloud, and then you’ve also got the applications to be able to monetize AI as well. So, when I look at their business model, I think they have very good diversification across the entire economic value chain for artificial intelligence.

Why Alphabet Sold Off After Strong Earnings

Dziubinski: That all sounds great, Dave. So, why did we see the stocks sell off so much after earnings? Was it the capital-expenditure spending?

Sekera: I think so. And I think it’s like we talked about at the beginning of the show; the market’s in the midst of this change in focus. It used to be these companies just couldn’t spend enough capex on AI. Everyone wanted to get that first-mover advantage in AI. And we’re now at the point where the focus is, “OK, well, you’ve got all this capex spending going on, but how are you going to actually make money to be able to make a return on all that capex spending?”

In this case, while Google is showing very good early stages of monetization, they still raised their capex further. They’re looking at over $200 billion of capex spending in 2026. I don’t know, Susan, I used to remember when $200 billion used to sound like a lot of money. But with that amount of capex spending, they’re going to be free cash flow negative this year and next year. So, to some degree, I think all of these hyperscalers are now turning into what the market’s looking at as really a show-me story on that monetization.

Is GOOGL Still a Buy?

Dziubinski: Alphabet was a pick of yours before earnings. It pulled back; we held our fair value. Is it safe to say it’s still a pick?

Sekera: Well, if I liked it at $350, I love it at $320. All kidding aside, there’s no change to our fair value. Our fair value is still $433 per share. With where it’s trading today, it’s a 26% discount. In our mind, that’s a pretty large margin of safety for the uncertainty that we think about the long-term business prospects for the company, enough to put it well into 4-star territory.

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