Alphabet Could Be 15% Undervalued After AI and Cloud Growth

Jim Cramer said on the September 30 episode of Mad Money that Microsoft's massive artificial intelligence investment is entering a new phase as the company begins turning its data-center buildout into higher revenue. Cramer noted Copilot now has 30 million users and growing, Azure is accelerating rather than contracting, and Microsoft is beginning to recoup its monster data center investment, which he compared to the payback period Nvidia's Jensen Huang once described for his semiconductors. In its fiscal fourth quarter, Microsoft Cloud revenue increased 27% to $59.3 billion, while Azure and other cloud services revenue grew 43%, and commercial remaining performance obligations rose 84% to $678 billion, including a 25% increase excluding OpenAI. CFO Amy Hood said on September 9 that Microsoft had reduced dock-to-live times for infrastructure by more than 50% over the year, even as capital expenditures reached $41 billion in the June quarter and first-quarter fiscal 2027 spending is expected to exceed $50 billion. Microsoft Cloud's gross margin fell to 65% in the June quarter, and the company generated $19.6 billion of free cash flow while paying $35.8 billion for property and equipment, leaving margins and cash flow worth watching as spending continues to rise.

Alphabet Inc. is positioned to extend a streak of earnings beats into its next quarterly report, according to Zacks Investment Research. Over the last two quarters, the company's average earnings surprise was 154.94%. In the most recent quarter, Alphabet was expected to post earnings of $2.88 per share but reported $9.11 per share, a surprise of 216.32%, following the prior quarter's result of $5.11 per share against a consensus estimate of $2.64 per share, a surprise of 93.56%. Alphabet currently has an Earnings ESP of +1.20% and a Zacks Rank #3 (Hold), a combination that Zacks research shows produces a positive surprise nearly 70% of the time.

Jefferies says a divided government may be the best midterm elections outcome for Big Tech players spending massive amounts of money to build out AI infrastructure. In a note on Monday, the Jefferies research team wrote that a split government and prospects for a national AI policy, rather than fragmented state-level rules, should ensure the rapid pace of AI innovation continues, disproportionately benefiting large, scaled players. The firm's biggest tech winners include Amazon, which benefits regardless of which AI model wins through a model agnostic platform approach; Alphabet, which gets more time to catch up in the AI model race with Gemini 4 Pro and beyond; Microsoft, which has the highest trust from enterprises given its pervasive presence in corporate IT shops; Oracle, emerging as the fourth enterprise cloud option with outsized upside if data center permitting and regulatory hurdles ease; CoreWeave, rapidly becoming recognized as a leading alternative to megacap hyperscalers; Snowflake, a top 2 vendor for AI data plumbing; Datadog, as observability becomes paramount; and Meta, on renewed consumer and small business momentum with Muse and Meta Business Agents. The analysts noted the president's party has lost House seats in 18 of 20 postwar midterms, and with Trump's approval near 39% and independents at 24%, they expect a GOP setback. The 2026 midterm elections are coming on Nov. 3, when voters will choose all 435 members of the House and 35 senators. Truist chief strategist Keith Lerner pointed out that every midterm election year since 1946 has been followed by positive one-year stock returns, with the biggest gain a 34% return after the 1954 elections and an average one-year gain of 14.4%.

Goldman Sachs strategist Ben Snider says the AI stock rally hinges on hyperscalers like Oracle and Amazon delivering another quarter of accelerating cloud computing adoption this earnings season. In a new note, Snider said Goldman's equity analysts expect year over year cloud revenue growth to increase from 48% in Q2 to 55% in Q3, after last quarter's accelerating cloud revenue growth and large revenue backlogs signaled monetization of capex investments. Micron offered an early validating sign last week, beating sales and profit forecasts for the quarter on voracious AI-driven demand, with guidance also strong; the memory chipmaker added about $43 billion in sales in the most recent quarter compared to the year-ago quarter, and operating margins exploded in all business segments. Executives told analysts on the earnings call that high chip prices and tight capacity would be the name of the game through 2028. D.A. Davidson analyst Gil Luria said expectations for tightening supply-demand conditions through both 2027 and 2028 meaningfully extend the industry's runway for strong pricing and earnings growth, addressing a key investor concern that current fundamentals represent a cyclical peak.

Alphabet reportedly won two separate US antitrust cases in late September, easing immediate legal pressure on Google. Google is helping form a cross industry coalition focused on AI data center development ahead of the 2026 US midterm elections, expected to address questions around power use, data sourcing and community impact from large scale AI computing hubs. The antitrust decisions support the view that Alphabet can keep rolling out AI powered features across Search, YouTube and Google Cloud without immediate structural remedies that break its distribution. The AI data center coalition cuts both ways, aligning with the potential to monetise AI infrastructure and long duration power contracts while spotlighting the risk that regulators and communities could still cap how far Alphabet can push energy hungry AI workloads. Analysts have already flagged regulatory pressure and high capital intensity as two of the biggest swing factors for the company.