alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) not only has it been working well lately. The 65% share price increase in the past year not only led all seven of the Magnificent Seven names, but extends what has now grown to a 280% gain from the low in early 2023. Wow!

This kind of heroic gain often intimidates interested investors, of course; it’s just a tough act to follow, especially given the stock’s valuation of 30 times this year’s projected earnings per share.

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However, there’s a reason why Alphabet stock could continue to rally this year and end up notably higher at this point in 2027. And that reason is (unsurprisingly) related to artificial intelligence (AI)… mostly.

Alphabet’s recently released fourth-quarter numbers were a breath of fresh air in an environment marked by disappointing results and a few too many prospects. technology unconditional The Google parent turned $113.8 billion in revenue into earnings per share of $2.82 compared with $96.5 billion and $2.15 a year ago, handily beating analysts’ expectations for a top line of $111.4 billion and a bottom line of $2.63 per share.

As expected, the company will almost double your capital expenditures next year, with most of that investment going to AI infrastructure. The only problem with this plan? He disagrees with concerns raised recently that some tech companies, including Microsoft i Oracle — spending too much on AI and getting too little return on their investment so far.

The alphabet seems to be a legitimate exception to this concern, however. Unlike many of its peers, every dollar that has been spent on artificial intelligence has been money well spent.

The chart below tells the story, comparing revenue from Google’s cloud computing arm (where results from its AI data center are reported) to that unit’s operating income. Revenue growth is accelerating, reaching $17.7 billion in the three-month period ending in December. However, operating income from its cloud unit is growing at an even faster rate, to $5.3 billion last quarter.

Whatever Alphabet is doing on that front, it’s doing well.

Alphabet’s AI-led cloud business isn’t their support, to be clear. Google Search and its other Google-branded offerings still collectively account for the majority of the company’s operating income.

Now, the cloud accounts for about 15% of Alphabet’s top and bottom lines, and is easily the organization’s fastest-growing arm with an explosive 48% year-over-year improvement last quarter, while cloud operating income doubled during that time period. That’s enough to move the needle on the entire company, so to speak, far more than most investors appreciate yet. They will find out over the course of this year.

This is still just the beginning, though. An outlook from Mordor Intelligence suggests that the global AI data center industry is poised to grow at an average annual rate of 25% through 2031, when it will be three times larger than it is now. Armed with gear like its new purpose-built Tensor processor units, this company is poised to continue earning at least its fair share of market growth.

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James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Microsoft and Oracle. The Motley Fool has one disclosure policy.

1 reason why Alphabet stock could deliver massive returns in 2027 was originally published by The Motley Fool