Both Meta and Apple could spend billions per year with this AI giant.
The “Magnificent Seven” have been the driving force behind the current bull market. The seven companies currently make up over one-third of the total market cap of the S&P 500, wielding a huge amount of influence over the benchmark index.
This year’s results have been mixed for the “Magnificent Seven.” While Nvidia and Meta Platforms (META -1.69%) are posting another year of market-beating returns, others like Apple (AAPL -0.19%) and Amazon have failed to keep up with the rest of the market.
But recent moves from Meta and Apple could help another member’s stock price soar well above the market averages once again in 2025 and beyond.
Image source: Getty Images.
A new big customer for this AI giant
Most of the “Magnificent Seven” are in competition with one another, often in multiple areas. But that won’t stop any of them from forming partnerships that make sense for both businesses.
Such is the case with a recent deal Meta signed with Alphabet (GOOG 0.56%) (GOOGL 0.63%). While the two compete for digital advertising dollars, Meta needs something Alphabet has: Compute. Meta’s building out new data centers as fast as it can, but its AI developments need more compute now. That’s why it struck a deal with Alphabet’s Google Cloud, committing to $10 billion in spend over the next six years.
After a massive hiring spree this summer, Meta needs to ensure that its highly compensated AI teams have enough compute power to develop all the projects it’s working on. That ranges from relatively simple machine learning models powering its recommendation engine to its new AI superintelligence team.
Meanwhile, Alphabet’s spending heavily to meet customer demand. Management recently updated its 2025 capital expenditures outlook from $75 billion to $85 billion. That said, management said during its second-quarter earnings call that it remains in a “tight demand-supply environment.” Its backlog climbed to $106 billion as of the end of the quarter. Another $10 billion on top of that from Meta represents nearly a 10% boost.
Alphabet is rapidly growing its cloud computing segment, and Meta’s new spend is helping. While it’s still scaling, Google Cloud sports an operating margin of just 21%. That’s well below Amazon Web Services, which is roughly twice its size and held an operating margin of 37% over the last 12 months. But Alphabet has seen its operating margin expand considerably over the last two years as it scales, so it could quickly approach AWS levels of profitability.
Meta’s business is a big win for Alphabet, as it helps it catch up with larger rivals like AWS.
Apple could deepen its relationship
Apple and Alphabet have a long-standing relationship, which has made the Google search engine the default in the Safari web browser for years. Alphabet reportedly pays $20 billion for that privilege, so it’s a good bet that it’s getting even more out of it from ad revenue. The company’s traffic acquisition costs last quarter totaled $14.7 billion, versus $54.2 billion in Google Search revenue.
Now, Apple is reportedly considering using a third-party large language model for the long-awaited AI-powered Siri assistant. Apple has struggled to incorporate AI into Siri and deliver other promised iPhone features that rely on generative AI. Instead of using its own Apple Intelligence LLM, it could use Google’s Gemini.
Such a deal would not only bring in additional revenue for Alphabet from a massive customer, it could cement its position as the default search engine for Safari for years to come. That said, Alphabet’s awaiting a ruling from a federal judge detailing remedies for its monopolistic powers. That might include a ban on deals like it’s made with Apple, making it the default search engine. However, a Gemini-powered Siri may provide another way to drive traffic to its properties.
Alphabet’s rack rate pricing for Gemini isn’t cheap. With over 2 billion active devices, Apple will likely pay billions of dollars per year to Alphabet to use its LLM in Siri. That can provide a meaningful bump to Alphabet’s top line, even as it approaches $400 billion in annual revenue.
Alphabet’s ability to win valuable contracts from Meta and Apple should encourage investors going forward. The two tech companies are poised to remain two of the biggest AI spenders in the world, and Alphabet’s positioned itself to take a significant share of that spending. With its shares trading for just 21 times forward earnings, the stock looks like a bargain. While it’s weighed down by regulatory uncertainty, it’s showing promising results across its business.
Adam Levy has positions in Alphabet, Amazon, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
