Mizuho, a major financial firm, recently raised its price target for Alphabet (Google's parent company) to $420, signaling strong confidence in its future.
At the heart of this optimism is a series of announcements involving Google, AI company Anthropic, and chipmaker Broadcom. These developments are more than just another business deal; they change the narrative for Google's most important growth engine: Google Cloud. The core reason is that they reveal a smarter, more profitable way for Google to capitalize on the AI boom.
First, let's look at the structure of the deal. Anthropic will significantly expand its use of Google's cloud services and its specialized AI chips, called TPUs (Tensor Processing Units). But instead of Google having to build all the massive, expensive infrastructure itself, Broadcom will manufacture and supply these TPUs for Anthropic based on Google's designs. This shifts Google’s role from purely a capital-intensive infrastructure builder to also being an intellectual property licensor. Analysts at Mizuho see this as an 'asset-light, royalty-like' model, which typically carries much higher profit margins.
Second, this new strategy is backed by solid financial proof. In its last quarterly report (Q4 2025), Google Cloud showed remarkable profitability. For every new dollar of revenue it brought in compared to the previous quarter, nearly 70 cents turned into operating profit. This high incremental margin validates the idea that as Google Cloud scales up—especially with large AI clients like Anthropic—its profits will grow even faster. It proves the business has significant operating leverage.
Ultimately, these events reframe Google Cloud's role within Alphabet. It's no longer just a source of revenue growth but is becoming a powerful profit center. This provides a crucial buffer against potential risks in Google's main search advertising business, especially as AI continues to evolve. The combination of a confirmed, large-scale demand from Anthropic, a more profitable business model for its TPUs, and proven margin power makes the path to a higher valuation much clearer.
- Glossary
- TPU (Tensor Processing Unit): A custom-designed computer chip created by Google specifically for accelerating artificial intelligence and machine learning workloads.
- Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, and equipment. High capex means a company is spending a lot on these items.
- Operating Income Margin: A profitability ratio that measures what percentage of a company's revenue is left over after paying for variable costs of production, such as wages and raw materials. A higher margin is better.