Over the last few years, hyperscalers like Amazon, Microsoft, and Alphabet (GOOGL 0.63%) (GOOG 0.56%) have poured hundreds of billions of dollars into artificial intelligence (AI) infrastructure.

Much of this capital has been geared toward securing graphics processing units (GPUs) and designing custom silicon from Nvidia, Advanced Micro Devices, and Broadcom — the backbones of the AI infrastructure revolution.

But why has big tech been so relentless in its pursuit of AI hardware? On the surface, the answer is simple: build sprawling data centers filled with clusters of high-performance chips to power AI workloads. Yet the deeper motivation is becoming clearer, and Meta Platforms (META -1.69%) may have just handed us the biggest clue.

According to reports, Meta struck a six-year $10 billion deal with Alphabet’s Google Cloud Platform (GCP). This isn’t just about the price tag. It signals how hyperscalers are positioning themselves for the next chapter of cloud computing in the AI era.

Let’s dig into Meta’s recent infrastructure investments and see how they align with this new cloud deal. For Alphabet, the implications of this deal could be huge — and investors should be watching closely.

Meta’s spending spree continues and…

Meta’s partnership with Google Cloud comes as the company is ramping up record capital expenditures.

META Capital Expenditures (TTM) data by YCharts; TTM = trailing 12 months.

Beyond its huge data center buildouts, Meta recently invested $14.3 billion in Scale AI, a leading data-labeling start-up. For those who are unfamiliar with what data labelling is, it’s the process of tagging raw data (i.e. images, audio) so AI models can understand and learn from it. This is vital for Meta because higher-quality datasets are the foundation to accurately train and scale its AI systems. Meta also unveiled a new research group, dubbed Meta Superintelligence Labs (MSL). Together, these initiatives highlight Meta’s ambitions to push past traditional large language models (LLMs) and position itself at the forefront of the next frontier in AI: artificial general intelligence (AGI).

… this time it’s Alphabet that benefits

Meta’s collaboration with Google Cloud follows a similar partnership between Alphabet’s cloud platform and ChatGPT maker OpenAI, signaling a subtle but important shift in the cloud landscape.

Even companies deeply tied to incumbents like Microsoft Azure and Amazon Web Services (AWS) are now diversifying to access Google’s tensor processing unit (TPU) chips and its AI-optimized infrastructure, which includes advanced cybersecurity protocols as a major differentiator.

While AWS pioneered the public cloud and Azure figured out how to dominate the enterprise information-technology landscape, Alphabet has carved out a role as an AI-first cloud provider, emphasizing machine learning and data analytics. The fact that both Meta and OpenAI have chosen Google Cloud underscores how strongly Alphabet’s strategy resonates with the companies setting the pace for the AI revolution.

At the same time, multicloud strategies are now becoming the industry norm. Businesses no longer want to be locked into a single vendor, especially as AI training and inference workloads grow more complex. By distributing workloads across providers, companies can optimize for cost, performance, and availability, while avoiding computing bottlenecks.

For Meta, this flexibility is crucial. As it scales up next-generation generative AI tools, develops agentic assistants, and enhances its advertising algorithms, tapping Google Cloud ensures both the capacity and unique specialization required to compete in an intense AI landscape.

Image source: Getty Images.

Is Alphabet stock a buy?

For Alphabet, the Meta deal stresses its strategic importance in the AI cloud ecosystem. Securing a multiyear, multibillion-dollar partnership not only boosts revenue visibility for Google Cloud but also validates years of heavy investment in AI infrastructure.

GOOGL PE Ratio (Forward) data by YCharts.

Yet despite this progress, Alphabet stock remains undervalued relative to peers in the cloud space.

Trading at a forward price-to-earnings multiple (P/E) of just 21, the market still appears to underappreciate the accelerating momentum across the company’s business.

To me, Alphabet stock is a no-brainer opportunity right now. It looks dirt cheap, and the new Meta deal further reinforces the company’s leading position among AI hyperscalers, even if the stock price doesn’t reflect that.

Billionaire Steve Mandel and his hedge fund Lone Pine Capital have been a great one to follow for individual investors. Although some hedge funds have a poor record of underperforming the broader market, Mandel has substantially outperformed the market over the past three years. So, when he makes a move in his portfolio, investors should pay attention.

One thing Mandel did during Q2 was sell off some of his Microsoft shares. Although it wasn’t a massive move, the hedge fund reduced its position by about 5%. Then, Mandel used some of those funds to invest in another promising AI stock that has increased in value by nearly 800% over the past decade.

That stock? Amazon (AMZN -1.16%).

AWS is the best reason to invest in Amazon right now

Amazon may not be the first company that comes to mind when you think about AI. Instead, it probably seems more like an e-commerce investment. While that sentiment is true for the consumer-facing portion, the reality is that a large chunk of Amazon’s profits comes from AI-related revenue streams.

The biggest is from Amazon Web Services (AWS), its cloud computing arm. Cloud computing firms are having a strong year, thanks to the massive demand generated by AI workloads. Because more companies can’t justify spending millions (or even billions) of dollars on a data center dedicated to training AI models, it’s far more reasonable to rent computing power from a firm that already has the capacity. That’s the idea behind cloud computing, and it has translated into strong growth for the business unit.

In Q2, AWS’s sales rose 17% to $30.9 billion. That’s strong growth, but it is a bit slower than its peers, Microsoft Azure and Google Cloud, which each grew revenue by more than 30% in Q2. However, AWS is much larger than both of these units, so it shouldn’t surprise investors that AWS is growing at a slower rate. AWS accounted for about 18% of Amazon’s total revenue in Q2, but it made up 53% of its operating profit. That’s because AWS has far superior margins compared to its commerce business units, making AWS a critical part of the Amazon investment thesis.

AWS is experiencing a significant boost from AI, making it a strong stock pick in this space.

But Microsoft is also a solid AI pick, so why is Mandel moving from Microsoft to Amazon?

Amazon’s stock looks more promising over the long term

From a valuation perspective, both companies trade at fairly expensive levels for their growth. However, they’re both priced about the same from a forward price-to-earnings (P/E) standpoint.

AMZN PE Ratio (Forward) data by YCharts

One thing Amazon has going for it that Microsoft doesn’t is the steady upward pressure on Amazon’s margins. Thanks to AWS and its advertising service business units being the fastest growing in Amazon, its margins are steadily improving. Although Amazon’s revenue growth rate appears to be somewhat slow, its operating income growth rate is actually quite rapid.

AMZN Revenue (Quarterly YoY Growth) data by YCharts

This trend still has years to unfold, which is a solid reason to transition from Microsoft to Amazon. I believe this will be a winning trade over the long term, as Amazon’s profits are expected to grow at a significantly faster rate than Microsoft’s, resulting in the stock outperforming its peer over the long term due to their similar valuations.

However, both stocks are still solid AI picks, and you can’t go wrong with either one.