Alphabet Inc - Class A

Alphabet's recent capex guidance has been updated to a range of $195 billion to $205 billion, reflecting an acceleration in capacity delivery to meet growing demand. This increase is indicative of the company's commitment to investing in AI and data center infrastructure, which is crucial for maintaining its competitive edge. The market's scrutiny over hyperscaler capex is evident, yet Alphabet's strategic investments position it well for future growth in AI-related demand. The ongoing expansion in AI capabilities and the company's ability to leverage its existing infrastructure create a strong moat, ensuring its relevance in a rapidly evolving tech landscape.

Alphabet is positioned strongly within the AI infrastructure buildout, which is driving significant capital expenditures across the tech sector. The combined capital spending of major tech companies, including Alphabet, is projected to reach nearly $900 billion next year, indicating robust growth and demand for AI technologies. This spending is not only fueling earnings growth but also creating a competitive moat for Alphabet as it invests heavily in data centers and technology. The historic nature of this investment wave suggests that Alphabet is well-placed to capitalize on the ongoing transformation in the tech landscape.

Alphabet faced additional legal and regulatory headwinds, which detracted from its performance. Investors are assessing the funding requirements, margin implications, and near-term free cash flow impact of elevated AI-related capital expenditure. Despite strong underlying cloud demand and improving monetisation, the scrutiny over Alphabet's investments raises concerns about the sustainability of its growth. The company is under pressure as the rapid adoption of agentic AI impacts the full compute stack, leading to increased volatility in returns.

Alphabet's recent performance has seen a dip of 7.8%, but we maintain a positive outlook. The increase in full year capital expenditure guidance to $205 billion for 2026 is viewed as a long-term strength rather than a concern. Alphabet stands out as the only hyperscaler with a fully integrated AI stack, which positions it well to capitalize on the ongoing adoption of AI technologies. This strategic advantage reinforces our belief in Alphabet as a core holding in the portfolio.

Alphabet's server useful lives increased from three years in 2020 to six years in 2024, which lowers the annual depreciation expense and boosts earnings. However, cash flows remain unaffected by accounting policy changes, highlighting a divergence between earnings per share growth and free cash flow per share growth across hyperscalers over the past four years.

We continue to view that spending as a source of long-term strength rather than a cause for concern. As the only hyperscaler with a fully integrated AI stack spanning chips, infrastructure, models, data and distribution, we believe Alphabet is exceptionally well placed to benefit from the ongoing adoption of AI and it remains a core holding in the portfolio.

Alphabet is a holding company that owns a collection of businesses, the largest and most important of which by far is Google. Google is the global leader in online search and advertising and also offers cloud solutions to businesses and consumers globally, with a goal of organizing the world’s information and making it universally accessible and useful. Alphabet reported quarterly financial results that were fundamentally strong and above consensus expectations for most key metrics. The company is seeing the positive benefits of its AI investments in all the core areas of its business, including accelerating search volumes, strong user engagement and streamlined content creation on YouTube as well as the broader advertising business, and faster growth in the company’s cloud business.

Alphabet Inc (GOOG), +23.2%, was our third-best performer in the quarter. After more than two years of market concern that AI chatbots would cannibalize Google’s core search business, recent results are proving those fears unfounded. Boosted by AI Overviews and AI mode, Search revenue grew nearly 20% in the most recent quarter. This performance was driven primarily by higher paid-click volume, alongside a modest rise in revenue per click—demonstrating that AI integration is enhancing, rather than displacing, the platform’s core value proposition. With market-leading positions across search, cloud, digital advertising, and AI, we believe Alphabet remains exceptionally well-positioned to earn strong returns on its capex and compound intrinsic value over time.

Alphabet Inc (GOOG), +23.2%, was our third-best performer in the quarter. After more than two years of market concern that AI chatbots would cannibalize Google’s core search business, recent results are proving those fears unfounded. Boosted by AI Overviews and AI mode, Search revenue grew nearly 20% in the most recent quarter. This performance was driven primarily by higher paid-click volume, alongside a modest rise in revenue per click—demonstrating that AI integration is enhancing, rather than displacing, the platform’s core value proposition. With market-leading positions across search, cloud, digital advertising, and AI, we believe Alphabet remains exceptionally well-positioned to earn strong returns on its capex and compound intrinsic value over time.

Alphabet was a contributor to performance during the quarter supported by the continued narrative that the company is a well-positioned beneficiary of the AI investment cycle. Its full-stack exposure spans infrastructure, foundational models, developer tools, and scaled consumer applications, providing broad participation in AI adoption. The stock benefited from the company’s Q1 report which highlighted robust ongoing demand for the company’s AI compute resources. We continue to view Alphabet as a high-quality, long-term compounder. Its leading global platforms, supported by strong network effects, direct user relationships, and scaled infrastructure, underpin durable pricing power and highly recurring revenue streams.