Why Alphabet Is the Undervalued AI Infrastructure Play Every Institutional Investor Should Own

In the rapidly evolving landscape of artificial intelligence (AI), Alphabet Inc. (GOOGL) has emerged as a quiet titan, leveraging its full-stack AI infrastructure to secure a commanding position in the market. Despite its gargantuan market capitalization of $3.77 trillion as of December 2025, institutional investors are increasingly viewing Alphabet as an undervalued play on AI-driven growth. This thesis is supported by a confluence of factors: robust institutional ownership, strategic capital allocation, and a valuation that appears to discount the company's long-term potential in the AI arms race.

Institutional Conviction: A Barometer of Confidence

Alphabet's institutional ownership has undergone a significant transformation in 2025, with Warren Buffett's Berkshire Hathaway acquiring a multi-billion-dollar stake, elevating the company to a top-ten holding in Berkshire's portfolio. This move underscores Buffett's recognition of Alphabet's strategic position in AI infrastructure and cloud computing, where the company has demonstrated exceptional revenue growth. For instance, Alphabet's Q3 2025 results marked a historic milestone, with consolidated revenues reaching $102.3 billion-a 15.9% year-over-year increase. Google Cloud, a critical growth engine, contributed $15.2 billion in revenue during the quarter, reflecting a 34% year-over-year jump.

Institutional confidence is further evidenced by the sheer scale of ownership. Approximately 40% of Alphabet's shares are held by institutional entities, including Vanguard Group Inc. and BlackRock Inc., with Vanguard alone controlling over 509 million shares valued at $78.8 billion. While 2,167 institutions reduced their stakes in the last quarter, 2,036 increased holdings, signaling a net positive sentiment. This dynamic suggests that Alphabet's long-term AI initiatives, including its custom Tensor Processing Units (TPUs) and global data center expansion, are seen as catalysts for sustained value creation.

AI Infrastructure: The Engine of Future Growth

Alphabet's commitment to AI infrastructure is not speculative-it is operationalized at scale. The company's projected 2025 capital expenditures of $91–93 billion are heavily weighted toward AI and cloud infrastructure, with Google Cloud ending Q3 2025 with $155 billion in backlog. This investment is paying dividends: Google Cloud's 33.5% year-over-year revenue growth in Q3 2025 highlights its role as a fast-growing segment within Alphabet.

The company's AI advancements are also deeply integrated into its ecosystem. For example, the Gemini 3 model processes 7 billion tokens per minute and powers over 650 million monthly active users on the Gemini App. These metrics illustrate Alphabet's ability to monetize AI not just through cloud services but through core products like Search, YouTube, and Workspace. Institutional investors are acutely aware that Alphabet's full-stack approach-combining hardware, software, and data-positions it to dominate the AI infrastructure market, much like it has in search and advertising.

Valuation: A Discount to Growth Peers

Despite its dominance, Alphabet's valuation appears undervalued relative to its AI infrastructure peers. As of December 2025, the company trades at 29.77 times earnings, a multiple that lags behind many of its high-growth counterparts. This discrepancy is striking given Alphabet's 33% year-over-year net income increase in Q3 2025 and its leadership in AI training and deployment.

The undervaluation thesis is further reinforced by Alphabet's ability to generate cash flow while reinvesting in AI. Unlike speculative AI startups, Alphabet's AI infrastructure is already a revenue driver, with Google Cloud's 34% year-over-year growth and the company's $100 billion revenue milestone in Q3 2025 serving as proof points. Institutional investors are betting that Alphabet's AI-driven monetization will outpace expectations, particularly as its TPUs and Gemini models gain traction in enterprise markets.

The Case for Institutional Ownership

For institutional investors, Alphabet represents a rare combination of scale, innovation, and valuation discipline. Buffett's pivot from Apple to Alphabet-reducing Apple holdings while increasing Alphabet's stake-signals a preference for AI embedded in cloud and software ecosystems over hardware-driven models. This shift aligns with the broader trend of institutional capital flowing into companies that can scale AI infrastructure profitably.

Moreover, Alphabet's regulatory challenges, while real, are increasingly seen as manageable headwinds rather than existential threats. The company's long-term AI initiatives, including its $91–93 billion capital expenditure plan, are designed to insulate it from short-term volatility. For institutions with a multi-year horizon, Alphabet's AI infrastructure is not just a growth story-it is a foundational asset in the digital economy.

Conclusion

Alphabet's institutional ownership, strategic AI investments, and undervalued valuation make it a compelling play for investors seeking exposure to the AI infrastructure boom. While the company's size may suggest saturation, its execution in AI-backed by Buffett's endorsement and institutional inflows-points to a future where Alphabet's dominance in AI infrastructure translates to outsized returns. For institutions willing to look beyond near-term noise, Alphabet is not just an undervalued stock-it is a cornerstone of the AI era.