Infra Play #104: So is GCP undervalued?
Is GCP the dark horse of Enterprise AI?
There is a lot of focus these days on the performance of the “MAG7” tech companies, the largest and most successful players by market capitalization. Since basically all of them are directly tied to the AI opportunity and have large tech sales teams (except Apple, bless their heart), it’s logical to ask questions such as ‘where can I get the best value?’
Alphabet (and in this context GCP) is often flagged as having the highest potential relative to its current valuation. Let’s explore this thesis.
The key takeaway
For tech sales: GCP is still being mostly sold as the underdog, at a time when their overall value proposition is clearly creating an opportunity to become the biggest player in the space. You can either sell with that vision in mind and drive large consolidations, or remain a “let’s discount and be thankful they pay attention to us” player.
For investors: Alphabet appears to be temporarily mispriced because the market can’t see beyond the dying cash cow of search. Knowing how the cloud business of Amazon and Microsoft ended up overtaking their original businesses, it appears that GCP+Gemini will follow the same cycle. The risk here is whether they can become the number one AI player given that they own the full stack, but at these valuations, investors are getting the AI transformation at a steep discount.
Q2 Vibe check
I’ll briefly touch on the AI stack before turning to quarterly highlights.
First, AI infrastructure. We operate the leading global network of AI-optimized data centers and cloud regions.
We also offer the industry’s widest range of TPUs and GPUs, along with storage and software built on top. That’s why nearly all gen AI unicorns use Google Cloud. And it’s why a growing number, including leading AI research labs, like Safe Super Intelligence and Physical Intelligence, use TPUs specifically. Our AI infrastructure investments are crucial to meeting the growth in demand from Cloud customers.
Next, world-class AI research, including models and tooling.
We continue to expand our Gemini 2.5 family of hybrid reasoning models, which provide industry-leading performance in nearly every major benchmark.
In addition to improving our popular workhorse model Flash, we debuted an extremely fast ‘Flash-Lite’ version.
We achieved gold-medal level performance in the International Math Olympiad, using an advanced version of Gemini with Deep Think. We can’t wait to bring Deep Think to users soon.
We have some of the best models available today at every price point. Our 2.5 models have been a catalyst for growth, and nine million developers have now built with Gemini.
I also want to mention Veo 3, our state-of-the-art video generation model. It’s been a viral hit, with people sharing clips created in the Gemini app, and with our new AI filmmaking tool, Flow. Since May, over 70 million videos have been generated using Veo 3.
And we recently introduced a feature in the Gemini app to turn photos into videos, which people absolutely love. It’s also rolling out to Google Photos users starting today.
Third, our products and platforms. We are bringing AI to all our users and partners through surfaces like Workspace, Chrome, and more. The growth in usage has been incredible.
At I/O in May, we announced that we processed 480 trillion monthly tokens across our surfaces. Since then, we have doubled that number now processing over 980 trillion monthly tokens, a remarkable increase.
The Gemini app now has more than 450 million monthly active users and we continue to see strong growth and engagement, with daily requests growing over 50% from Q1.
In June alone, over 50 million people used AI-powered meeting notes in Google Meet.
When evaluating GCP, it’s difficult to ignore the overall situation at Alphabet, as investment and attention are interconnected. A number of important IT decisions can also be influenced by the ecosystem benefit. For example, a large Workspace customer might see onboarding onto Vertex AI or Wiz as a logical step in their expanded relationship.
At the core of the AI play for Alphabet as a company is the need for Gemini to succeed, both in Enterprise and the consumer space. For this to work, you need to essentially achieve 3 goals:
Deliver outstanding customer experiences in your consumer-facing applications (i.e., Search).
Extend adoption of AI features within Android and among regular users of Workspace products.
Offer best-in-class developer tools for growing GCP market share.