Google goes from laggard to leader as it pulls ahead of OpenAI with stellar AI growth

SAN FRANCISCO, Feb 5 (Reuters) – Alphabet is taking on OpenAI with a gusto that underscores Wall Street’s perception that the Google parent is the leader in AI, a turn of events from a year ago when investors thought it was badly lagging behind rivals and punished its stock.

That showed in the confident tone executives struck on the post-earnings call, the first since Alphabet released the Gemini 3 model.

But its shares fell 3% on Wednesday after the company said it would spend up to $185 billion this year, deepening investor scrutiny as the expenditure potentially more than doubles from 2025 and eclipses rivals Microsoft, Meta and Amazon.

“We’re quickly getting to north of a trillion dollars in combined 2026 investment across the mega caps if we consider both capital expenditure and associated resourcing needs,” Bernstein analyst Mark Shmulik said.

“For that trillion to pay off suggests the total addressable market for AI-driven products and enhancements needs to be multiples of that very quickly.”

For now, the AI spending is reaping returns, and its shares remain more than 80% higher in the past 12 months even with Thursday’s decline.

Alphabet’s prepared remarks about AI in 2025 had focused on product usage and AI revenue generated specifically via its cloud-computing unit.

Cloud unit revenue surged 48% in the December quarter. That came as Wall Street’s has sent a stark message to tech companies: Soaring AI spending can continue only if tech companies demonstrate commensurate financial returns.

“Overall, we’re seeing our AI investments and infrastructure drive revenue and growth across the board,” CEO Sundar Pichai said.

Google’s conviction about AI-fueled revenue is backed by growth in both its consumer and enterprise businesses.

Pichai said the Google Gemini app, which competes with OpenAI’s ChatGPT, exceeded 750 million monthly active users at the end of the December quarter, compared with 650 million in the prior quarter.

That still trails ChatGPT, which OpenAI CEO Sam Altman said in October had eclipsed 800 million weekly active users.

“We are also seeing significantly higher engagement per user, especially since the launch of Gemini 3,” Pichai said.

Gemini 3 has also been integrated into “AI Mode” in Google’s search engine and powers Google’s enterprise version of Gemini, which Pichai said had reached 8 million paying licenses.

TURNING TIDE

Since the start of last year, Alphabet has gone from laggard to leader among the “Magnificent Seven” megacap companies and is now matched by only Nvidia and Apple among companies with market capitalizations of more than $4 trillion.

Despite taking a comparably modest tone on capital spending for the year, Microsoft’s shares took a massive beating last week, due in part to heightened concerns about its reliance on OpenAI. The company said its fiscal third-quarter spending would decrease from the record $37.5 billion it shelled out in the October-to-December period.

With OpenAI striking a string of multi-billion-dollar deals despite still losing money, investors have grown concerned about the company’s ability to finance those commitments, souring sentiment around major tech firms with which it has close links.

Paul Meeks, head of tech research at Freedom Capital Markets, said Alphabet was benefiting from a contrast in sentiment, despite a capex forecast that was “eye-watering.”

“I do think there’s a narrative emerging here where the market is favoring Google versus OpenAI,” Meeks said. “This time last year, every announcement by OpenAI to do business with somebody was applauded. But then in late 2025, now people are saying, ‘Oh my god, too much of my revenue backlog or AI infra spending is coming from OpenAI.'”

Shares of Oracle, whose contract backlog of more than $500 billion hinges largely on OpenAI, are down about 49% since the start of October. Microsoft, which holds a 27% stake in OpenAI and counts it as a massive customer, has slid more than 20% over the same period.

Meanwhile, Alphabet has jumped about 36%.

“The deals that OpenAI has with Microsoft and Oracle are highly tied to their ability to raise future funds,” said Dan Morgan, portfolio manager at Synovus Trust. “I think that is why you are seeing the street favor Alphabet.”

Alphabet’s deep war chest has been filled by major deals that it has struck in recent months to power products and infrastructure at tech firms Meta and Apple.

“If you are software and you are connected to OpenAI, you’re doubly not intriguing to people. Right now, Google has the hot hand,” said Eric Clark, portfolio manager of the LOGO ETF.

(Reporting by Deborah Sophia in Bengaluru and Kenrick Cai in San Francisco; Editing by Sayantani Ghosh and Thomas Derpinghaus)