KEY POINTS
- Alphabet (NASDAQ:GOOGL) joined the Dow Jones Industrial Average on 29 June, replacing Verizon, and rose about 4% on its debut.
- Yet the stock had a rough June, caught in a broad tech pullback, even though the business is doing well.
- The under-the-radar story is that Google ran out of AI capacity to sell Meta, which we read as a demand signal, not a weakness.
- We see the drop as nerves about heavy spending, not a crack in the business.
Alphabet (NASDAQ:GOOGL) joined the Dow Jones Industrial Average on 29 June, rising about 4% on its first day in the famous index and steadying after a rough mid-June pullback. The stock is up more than 10% for the year, yet June was still bumpy, dragged around by a broad tech selloff over AI spending. In our view, the Dow milestone is mostly symbolic. The story that really matters is a quieter one about AI demand.
Why Google Running Out of AI Capacity Is a Bull Signal in Disguise
Here is the detail that got less attention. Back in March, Google told Meta it could not sell it as much of its Gemini AI computing power as Meta wanted. The reason was not price or a dispute. Google simply ran out of capacity. It is a telling sign of how fierce the demand has become, the same force behind Meta’s own move to sell spare AI compute.
That may sound like a problem, but we believe it is the opposite. There is a big difference between a business that cannot find customers and one that has more than it can serve. Google’s is the good kind: too much demand. The numbers back this up. Google Cloud revenue jumped 63% last quarter to over US$20 billion, and the company is sitting on an order backlog worth around US$462 billion.
The demand is so intense that Google has even agreed to rent extra AI computing power from SpaceX, at a reported US$920 million a month from late 2026, just to keep up. When demand is this strong, the only limit is how fast Google can add capacity.
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The Other Side: Huge Spending and the Cash Question
Now the concern. Building all that capacity is hugely expensive. Alphabet plans to spend US$180 billion to US$190 billion this year, almost double last year. It is funding this from a position of strength, with well over US$120 billion in cash, topped up by a roughly US$80 billion equity raise (which included a US$10 billion private placement to Berkshire Hathaway) to keep plenty of liquidity on hand. A few high-profile AI researchers have also left for rivals, which rattled some investors.
This is the real tension. All that spending drives sales, but it also strains cash flow and margins in the near term. In our view, the investment is defensible precisely because the demand is already there, but investors are right to want proof it turns into profit.
The Investor’s Takeaway for Alphabet
Our take: the selloff looks more like nerves about spending than a crack in the business, and the valuation has cooled with it. The stock now trades at roughly 22 to 25 times earnings, down from about 29 times late last year, which is not stretched for a company growing its cloud arm this fast.
For long-term investors who can handle volatility, the pullback may be a reasonable entry into a genuine AI and cloud leader, especially against the wider volatility that has hit AI and chip stocks this week. More cautious investors may prefer to wait for the 22 July earnings report to see whether the spending is paying off.
The one thing that would change our view is signs that the capacity is being built faster than customers can fill it. For now, a full restaurant is a far better problem than an empty one.
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