I Keep Buying Alphabet Expressly Because of Chips and Interest Rates
Most investors run from Alphabet the moment they see its chip spending and rate exposure. Those are precisely the two reasons it keeps landing at the top of my watchlist.
I keep coming back to Alphabet (NASDAQ:GOOGL | GOOGL Price Prediction) again and again. Two things scare a lot of investors away from this company: its chip spending and its sensitivity to interest rates. Those same two things are why I keep researching this company.
The case is simple: Alphabet designs its own AI chips, runs them in its own data centers, trains its own Gemini models on them and sells the whole package to consumers and enterprises. Very few companies own every one of those layers. Alphabet pays for that expansion with a balance sheet that shrugs off higher borrowing costs.
Homegrown Chips Already Pay the Bills
Google Cloud’s AI infrastructure offering includes TPU systems, the chips Alphabet designs itself. In the second quarter, Cloud revenue reached $24.768 billion, up 82%. One quarter earlier, management reported a Cloud backlog of over $460 billion. To me, that backlog means customers have already signed up for years of demand for computing power Alphabet builds itself.
The usage numbers back that up. Gemini models process 22 billion API tokens per minute, its app has 950 million monthly active users and nearly 90% of the Fortune 100 use Gemini Enterprise. Chief executive Sundar Pichai said the results “show that our differentiated, full stack approach to AI is delivering real, measurable value” for consumers, customers and partners.
Interest Rates Barely Dent This Balance Sheet
Rates matter here because Alphabet now borrows to build. What reassures me is the buffer. Its interest coverage ratio is 175.5x, its leverage ratio is 0.143 and its net debt is just 0.190 times EBITDA. Operating income reached $40.77 billion last quarter, up 30.4%, and operating margin expanded to 34%.
The core business keeps growing, too. Revenue rose 24.2% to $119.80 billion, the 12th straight quarter showing double-digit growth. EPS of $9.11 beat estimates for the 11th consecutive quarter.
Why Alphabet Edges Out Microsoft and Amazon
The names most readers would pick first are Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). Alphabet stands out against both for two reasons: price and buffer. Alphabet trades at a P/E of about 15, compared with roughly 30 for Microsoft and 36 for Amazon. Microsoft covers its interest about 51 times and Amazon about 35 times. Leverage points the same way: 0.29 at Microsoft and 0.37 at Amazon. One concern: Alphabet’s P/E gets a lift from a $99.03 billion gain from its equity holdings last quarter, so I check it against operating results.
Risk I Refuse to Ignore
The expansion is expensive. Long-term debt rose from $46.5 billion to $98.2 billion, and interest expense jumped nearly 5x from a year earlier. Free cash flow fell to a negative -$5.855 billion as capex reached $44.924 billion. Alphabet also stopped buybacks and raised ~$70B in combined equity and debt, and the stock sales dilute holders like me. If AI demand cools while rates stay high, that combination would hurt.
My thesis holds because the spending is already bringing in revenue. Operating cash flow came to $39.069 billion last quarter, and fiscal 2025 free cash flow totaled $73.266 billion.
Reasons Alphabet Stays on My Radar
The stock is up 34.01% over the past year but down 5.69% over the past month, and I see a decline like that as a reason to study the business more closely. Alphabet also raised its quarterly dividend 5% to $0.22 per share, a small but growing source of income. I plan to keep watching it closely if Alphabet continues turning its own chips into cloud revenue and covering its interest bill 175.5 times over.
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