OpenAI And Alphabet Forge Strategic Cloud Partnership
OpenAI has recently partnered with Alphabet's Google Cloud Platform, marking a significant development in the AI landscape.
For more than two years, ChatGPT developer OpenAI has been a pivotal force in the artificial intelligence revolution. The company has secured billions in funding from Microsoft, collaborates closely with prominent AI-focused cloud providers like CoreWeave, and is a key participant in a $500 billion domestic AI infrastructure initiative known as Project Stargate.
Recently, OpenAI made headlines again with news of a major partnership with Alphabet (GOOG) (GOOGL).
Let's delve into how OpenAI and Alphabet are collaborating and evaluate why this agreement could be a significant turning point.
OpenAI's Strategic Move to Google Cloud
Microsoft's investment in OpenAI extended beyond mere capital infusion. As part of their alliance, OpenAI became deeply integrated into Microsoft's cloud service, Azure.
While Azure's infrastructure has been crucial for OpenAI to sustain its rapid growth over the past two years, recent actions by the ChatGPT creator suggest an effort to avoid vendor lock-in with Microsoft.
For example, within Project Stargate, Oracle is reportedly considering purchasing several billion dollars worth of Nvidia's latest Blackwell GPU architecture and leasing access to these chips to OpenAI.
According to recent reports, OpenAI's partnership with Alphabet centers on the same objective as the Oracle deal: accessing computational power through the Google Cloud Platform. As data workloads continue to expand, training and inferencing AI models become increasingly complex and expensive. Consequently, diversifying its cloud compute infrastructure beyond Azure is vital for OpenAI.
Image source: Getty Images.
How This Deal Could Revolutionize Alphabet's Position
Although cloud computing has become a fast-expanding business for Alphabet, Google Cloud operates on a significantly smaller scale than Microsoft Azure and Amazon Web Services (AWS). That said, collaborating with OpenAI might seem unusual from an external perspective, as the platform could be viewed as both a technical competitor and an existential threat to Google's search business and AI initiatives.
However, I believe there's a more compelling aspect to this relationship, where Alphabet is hedging the economic profiles of its various platforms.
Since ChatGPT emerged, skeptics have been raising alarms about Alphabet's internet search business (Google). The pessimistic view is that inputting a query into a chatbot like ChatGPT and instantly receiving a detailed response will steer people away from the traditional Google search process.
Although Alphabet continues to command significant internet presence through properties like Google and YouTube, some search trends are starting to suggest that ChatGPT and other large language models may be encroaching on Google's dominance. In turn, Alphabet's search advertising empire might be facing challenges.
While the precise details of the OpenAI and Google Cloud relationship are confidential, I have some thoughts on why this deal could be strategically beneficial for Alphabet.
In a scenario where OpenAI and its counterparts begin to erode Google search—thereby impacting Alphabet's advertising revenue—Alphabet can still capture some downstream monetization. This means Alphabet's cloud infrastructure business gains revenue that might otherwise be lost from the consumer-facing advertising segment of Google search. This new stream of cloud revenue can help narrow the gap with AWS and Azure.
Additionally, a potentially far more lucrative opportunity for Alphabet could be to enhance Google's own AI capabilities by gaining visibility into OpenAI's workloads. Granted, this point is somewhat speculative for now, as it's not entirely clear what insights Alphabet will gain regarding OpenAI's data flow.
Investment Outlook Is Alphabet Stock Undervalued
In the chart below, investors can observe that Alphabet trades at a notable discount compared to its cloud hyperscaler peers on a forward earnings basis.
GOOGL PE Ratio (Forward) data by YCharts
The valuation disparity between Alphabet and its peers could indicate an overly pessimistic narrative, rooted in two main areas. First, some investors might believe that Alphabet entered the cloud computing race too late and will never catch up to Amazon or Microsoft. Second, the rise of OpenAI has been labeled an existential threat to Google for years—and I think Alphabet's steep discount relative to its peers reflects such a narrative.
As outlined above, however, the irony of Alphabet's deal with OpenAI is that the company might have unlocked a backdoor channel to continue thriving even as its core search business faces increasing pressure.
To me, the deal with OpenAI is a transformative game changer for Alphabet in the long term, and I view the stock as a compelling buy right now.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
