Alphabet Inc. (GOOGL) closed out 2025 looking like the poster child for how to actually make money while everyone else just talks about AI. Goldman Sachs thinks that's worth a higher price, bumping its 12-month target to $400 from $375 in a note released Thursday.
Analyst Eric Sheridan pointed to accelerating Google Cloud growth, search holding steady, and disciplined spending even as the company pours cash into AI infrastructure. The new target suggests roughly 20% upside from where shares traded Wednesday.
"This quarterly report continued a trend that started in late summer 2025 with Alphabet demonstrating continued operating momentum in its core business while scaling its consumer and enterprise AI efforts," Sheridan wrote.
Cloud Business Hits a $70 Billion Annual Run Rate
The real fireworks came from Google Cloud, which grew revenue 48% year over year in the fourth quarter. That blew past Goldman's own 40% estimate and underscored just how hungry enterprises are for AI computing capacity.
The Cloud backlog swelled to $240 billion, up 158% from a year earlier and 55% sequentially. Goldman noted that Alphabet signed more billion-dollar-plus deals in 2025 than it did in the previous three years combined. When you're closing that kind of business, you're not just selling storage anymore.
YouTube Ads Cooled Off, but Subscriptions Picked Up the Slack
YouTube advertising revenue grew 9% year over year, which sounds fine until you realize it missed Goldman's forecast and slowed from the previous quarter. The firm chalked that up to tough comparisons against political ad spending in late 2024 and a broader shift toward paid subscriptions.
Management actually framed that mix shift as a positive for overall revenue quality. Subscriptions, Platforms and Devices revenue climbed 17% year over year, and Alphabet ended 2025 with more than 325 million paid subscriptions across its consumer services.
Beyond the core businesses, Alphabet confirmed it led a fresh funding round for Waymo, signaling renewed focus on commercializing autonomous driving. Meanwhile, both Services and Cloud operating income beat estimates, even as capital spending climbed sharply.
The $180 Billion Question: Can AI Spending Pay Off?
Alphabet is guiding for $175 billion to $185 billion in capital expenditures in 2026, nearly double what it spent the previous year. Goldman said the spending breakdown is roughly 60% servers and 40% data centers, all in service of building out AI infrastructure.
The firm acknowledges investor jitters around that level of spending but views it as strategically necessary and long-term focused.
"Alphabet has climbed a steep wall of worry in the past 12 months around the AI theme," Sheridan said.
Here's the kicker: even with this investment ramp, Alphabet is expected to stay free-cash-flow positive. That's a rare feat at this scale, and it's exactly why Goldman isn't worried about a pullback.
"We don't see any reasons to suspect a pause or step back in terms of its operating proof points that would change investor perception over the near term," Sheridan added.
Goldman also noted that Alphabet's management still expects supply and demand for AI capacity to remain out of balance through the end of the year. The firm now projects 2026 revenue of $472.2 billion, up from a prior estimate of $456.1 billion, with GAAP earnings per share reaching $10.66.
