Geoffrey Seiler, The Motley Fool
5 min read
In my view, artificial intelligence (AI) stocks will once again lead the market higher in 2027. However, I think there will start to be a rotation away from the pure-play pick-and-shovel infrastructure players and toward the hyperscalers that control the bulk of the spending. And against that backdrop, I think Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is poised to be the best performing stock among AI mega-caps in 2027.
Whenever a new technological evolution is in its early phases, a large fraction of the gains go to the hardware companies that lay the foundation for it. However, in later stages, the gains should increasingly go to the companies that are benefiting from the prior investments.
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This pattern could certainly be seen in the dot-com boom. Hardware giants like Cisco, Sun Microsystems, and JDS Uniphase led the early build-out, but companies like Amazon and Google (now Alphabet) were the ones that captured the vast majority of the cumulative economic value over the long run.
I think a similar dynamic should start to play out again beginning next year, with Alphabet in position to be the clearest beneficiary. One of the biggest differences between the dot-com era and the AI era is that some of the companies funding the current build-out are the same ones building the end-user applications and platform ecosystems. Back in the late 1990s, it was telecoms that were doing most of the heavy lifting on infrastructure, while today it is the hyperscalers themselves. That is also one of the big reasons why these companies have been increasingly designing their own chips, and this is where Alphabet shines.
During the early phases of a new infrastructure build-out, there typically are large supply-and-demand imbalances. In this case, that gave semiconductor companies massive pricing power. The greatest example of this can be seen in the memory market, where prices have skyrocketed to unprecedented heights due to the shortage of memory chips. However, over time, supply chains normalize, production catches up to demand, and hardware prices come down. Investors have already started pricing in the potential of this happening.
Multiple advantages
In this middle phase that we are entering now, Alphabet has the biggest advantage because it has designed its entire ecosystem around its powerful custom Tensor Processing Units (TPUs). These processors give it a huge cost advantage in training its own AI models and running inference workloads. They also provide it with the strongest long-term cloud computing economics.
